Written evidence from The Pensions Regulator (PSL0043)
Protecting pension savers – five years on from pension freedoms: saving for later life
Introduction:
We welcome the committee’s ongoing inquiry, protecting pension savers - five years on from the pension freedoms and the contribution it is making to the debate on pension saving. Our written evidence below is in response to the third part of the inquiry looking at saving for later life and we have grouped our responses to the committee’s questions into three sections:
The Pensions Regulator (TPR) is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members' benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator's functions under Part 3 of the Pensions Act 2004 only).
TPR is a non-departmental public body established under the Pensions Act 2004. Our sponsoring body is the Department for Work and Pensions (DWP) and Parliament sets the legal framework within which we operate.
Executive summary
There is a clear consensus that how we save into pensions has changed radically in the last decade. The impact on those who provide and govern pensions – including employers and trustees - has been far-reaching, with new duties and rules coming at an expeditious rate.
But for the saver, the changes have been just as fundamental and brisk.
Automatic enrolment (AE) has revolutionised the way many people save into their pension while Pension Freedoms now give consumers more choice about when, and how, they access their pension savings. Authorised master trusts and the Pension Schemes Act 2021 (which introduces pensions dashboards, collective defined contribution schemes, and greater powers for TPR to secure saver outcomes) are all driving further change for us, the marketplace, and for savers.
We recognise and embrace this seismic shift, which is why we are working hand in hand with other regulators and organisations across the pensions landscape to put the saver at the heart of what we do. Despite the success of this strategic joint working, we know there is more to do.
Millions of people are now saving into defined contribution schemes, thanks to the success of AE, and this must be welcomed. 98% of memberships are in schemes being used for AE: 21.4 million out of 21.9 million.
Collectively, we have built a system that has harnessed inertia, to get those not previously saving for later life started on the journey, but we recognise that as they progress through this journey, they will have important decisions to make. As such, we must continue to make sure that the system is robust, a system in which savers in defined contribution (DC) schemes – who are shouldering more risk - receive value for money (VfM) and the level of security they deserve.
Our data shows more than 90% of DC savers are automatically enrolled into an authorised qualifying master trust, which deliver high governance standards, a greater level of security for savers, charge caps and ensure some level of value for money. Following the authorisation and supervision regime introduced by PSA 2017, the number of master trusts in the market has dropped to 36. However, memberships have increased to 20.7 million[1].
But we also know that some savers struggle to engage with their pensions. Many only make the minimum contributions to their pots and the vast majority rely on others to choose their pension scheme and where their cash is invested.
A lack of personal engagement could mean that savers miss the chance to consider the best option for them. There is a risk that for some, this lack of engagement could mean they fail to optimise their pensions, remain in poorly performing funds or at worst, fall victim to scams.
Almost all savers will be put into a default investment fund. While the default fund may suit the majority, for others personal circumstances, age and savings history may mean they choose to invest in a different fund from the default fund to better reflect their own circumstances and savings targets.
We are committed to working with our partners in regulation at the FCA, the Prudential Regulation Authority (PRA) and the Money and Pensions Service (MaPS), as well as with government and industry to ensure the system works for all whether they engage or not, while at the same time trying to improve levels of engagement in future. A great deal of work is going on.
For example, in the Spring we will feedback on a discussion paper on a VfM framework with the FCA. The government has announced new rules to help nudge savers to take guidance from Pension Wise before accessing their pots and is looking at the information savers receive about their pension savings and when they receive it. This includes the introduction of simpler annual benefit statements, as well as the introduction of Pensions Dashboards. Meanwhile, MaPS’ UK Strategy for Financial Wellbeing sets out an ambition to improve financial wellbeing and understanding of pensions.
Again, working with the FCA our Consumer Journey call for input[2] explores what else we can do to help support people in their saving choices. We are working together to delve deeper into the factors affecting how consumers save for their retirement and to find ways to improve the journey from joining the workforce to retirement. We will also feedback on our findings later this year.
The need to protect savers is the underpinning principle of our new Corporate Strategy[3], which recognises the shift from DB to DC saving and sets out five priorities to improve savers’ outcomes.
While we are not responsible for pension policy design and legislation, which falls to the DWP, we have carried out our own detailed analysis on the trends and risks within the saving landscape. This supports our new strategy, and we say more about this later.
Different groups of pension savers face distinct challenges in meeting their needs today and making provision for tomorrow. To put the saver at the heart of our work, our strategy-setting process has been grounded in an analysis of pension savers: their needs, the challenges they face, and how the changing landscape may shape their financial futures.
Our five strategic priorities and commitment to savers were determined in response to this analysis. They seek to ensure that all savers’ pensions are enhanced and protected now and in the future. Our focus must evolve from a scheme-based view to one that puts the saver at the heart of all that we do.
The committee’s questions:
Section 1: The future of UK pension saving and automatic enrolment
Q1: Do households in the UK have adequate pension savings for retirement?
Q2: Are changes needed to auto-enrolment to provide an adequate level of pension savings for retirement?
Participation in pension saving in the UK is the strongest it has ever been.
Thanks to the combined efforts of government, the pensions industry and employers across the country, more than 10 million people have been introduced to pension saving for the first time, or saved more because of automatic enrolment (AE).
Since the introduction of AE in 2012, participation in pension saving has almost doubled in the private sector, with £105.9 billion saved in 2020 across both private and public sectors. DWP research shows pension participation rates for staff in 2020 is 89% for 40- to 49-year-olds and 85% for 22- to 29-year-olds. Since 2012, the largest increase was seen in the 22 to 29 age group, increasing from 24% in 2012 to 84% in 2020.
AE is a strong opportunity to save for retirement and people now expect a workplace pension as part of their employment. We now want to see savers getting to know their pension and consider if they can save more, where appropriate. The introduction of simpler statements and Pensions Dashboards will serve to help people make better decisions about their retirement planning.
As our focus in AE is on employer compliance, we do not collect data around adequacy; however, much research has been carried out on this issue. We aim to prevent problems arising by communicating clearly with employers about their duties. To meet our statutory objective to maximise employer compliance with AE, we use published guidance to provide detailed help aimed at professional advisers, large employers with in-house pensions expertise and those with a sound knowledge of pensions. In addition to the detailed guidance, we provide the small and micro companies with simple step by step guidance on our website, supported by direct communications.
We also use a suite of powers to take action when things go wrong, to ensure savers are protected. We publish regular [4]compliance and enforcement bulletins to update on how often we use our powers.
The adequacy of pension savings, particularly AE contribution levels, is a matter for government. As a regulator, our job is to make sure that the system savers are in is well run, providing the best possible outcomes.
DWP’s 2017 AE review:
We support the proposals in DWP’s 2017 review which set out the department’s ambition to remove the lower qualifying earnings threshold and lower the age threshold in the mid-2020s. In particular, we welcome the fact that this may encourage retirement saving in some communities that have not previously been in scope which we believe will improve equality of outcomes.
The report was clear that implementation will be subject to learnings from the phased increases to reach the minimum 8% contributions in 2018 and 2019, discussions with employers and others on the right approach and finding ways to make these changes affordable.
Together with DWP we will look at this and consider the optimal approach in light of the impact of the pandemic and supporting the economic recovery. However, we note that the precise timing of any changes to AE would be a matter for government and subject to the Parliamentary process.
In respect of adequacy and coverage, we will work with DWP, employers and industry to find the most appropriate way to increase contributions and bring a greater diversity of workers into AE.
Impact of phasing
We can report to the committee that after the phased increases to 5% and then 8%, compliance remained high, with employers continuing to make the correct contributions for their staff. We did not see a significant increase in opt-outs, cessations or non-compliance.
Our own compliance and enforcement analysis of Real Time Information (RTI) data, which provides information on the employee contributions, showed that after the first phasing increase came into effect in 2018, compliance with the requirement for employers to pay contributions on time remained near to 100%, implying that the majority of employers had applied the increases correctly from that date. Similarly high levels of compliance followed the second increase, which came into effect in April 2019.
In the lead up to phasing, through our direct and in-direct communications, we ensured employers were aware of the changes in good time, encouraged employers to ensure they had plans in place, including financial planning.
A great deal of the success of AE is attributed to employer support and high compliance levels. Key to high compliance is minimising employer burden. Since the start of the AE roll out in 2012, TPR has worked hard to remove barriers to compliance so that the process of AE is as affordable and straight forward as possible. This includes ensuring employers have all the information and notice they need in order to meet their responsibilities successfully.
A focus on value
We are looking at possibilities for encouraging large employers that have greater access to expert advice to consider how the scheme they choose for their staff provides good value for money, and are encouraging them to be more proactive in highlighting the benefits of pensions to staff. Again, we are mindful of employer burden and would take a cautious approach to introducing any additional employer responsibilities such as requiring employers to look again at their AE scheme choice.
Nevertheless, a focus on value, and how to measure it, is vital. We are helping to lead the debate in the UK on whether savers are receiving value for money from their workplace pensions, including master trusts. We believe that driving up value and ensuring employers are able to check the scheme they have chosen for their workers is the right one, including an assessment of investment strategy, would have a positive impact on retirement outcomes.
To test this, we commissioned the Pensions Policy Institute to carry out an international comparison[5] of the determinants of VfM and delivering good outcomes to savers. The report showed that after contribution rates, investment performance had the single biggest impact on good outcomes. From modelling of a median earning male, aged 32 in 2022, who works full time from age 18 to State Pension Age (SPa), contributing 8% of total earnings from age 22:
The report also concluded that: “By setting clear, measurable and comparative standards and benchmarks for performance in the key areas of delivery – investment, administration, engagement – it is possible to drive a more effective tendering process for these services to secure VfM.”
Other research, such as the Hymans Robertson Master Trust Insight Report[6], shows the spread of master trust default funds across different phases of a saving journey, illustrating the wide variance in investment return default strategies and the volatility in achieving them.
So, in September last year, we and the FCA published a joint discussion paper on developing a common framework for measuring VfM in DC schemes. We are determined to drive a long-term focus on VfM across the pensions sector. DC savers can only maximise their retirement income if their scheme delivers value for money. For us, this means well-run schemes delivering good investment performance that is not eroded by high costs and charges.
Adequacy: Would another contribution rate increase work?
Our research shows that the majority of employers are supportive of AE and think it is good for their staff.
However, while current levels of saving are a tremendous improvement on the pre-AE landscape, certain stakeholders believe that for some, current levels are at risk of not being sufficient to deliver the retirement outcomes many hope for. (The PLSA’s Retirement Living Standards, which has been updated to reflect the increase in the cost of living, give a good indication of what people can expect depending on how much they save.)
The PLSA’s research, Retirement Income adequacy: generation by generation[7], originally published in 2016, recommended an increase in minimum contributions once the impact of phasing from 5% to 8% was clear. It said the step was necessary to ensure that nearly half of the 25.5 million people in employment who are not saving enough can achieve an adequate level of retirement saving. The think tank Onward recently said in its report Levelling up pensions to boost savings by £2.8 trillion that abolishing the earnings threshold and reducing the eligibility age to 18 would boost the savings for some of the least well-off while unlocking billions for investment.
A key question and challenge therefore is should savers be mandated to save more, through a rise in minimum AE contributions? Or should we encourage those that can afford to save more to do so on a voluntary basis, noting an increase in minimum contribution levels could have a determinantal impact for some on lower incomes or with personal debt?
Increases in mandatory contributions is a matter for Government. Our evidence above shows that the increases to 5% and 8% had a negligible effect on compliance levels and therefore achieved the goals of increasing the levels of savings. However, this is clearly only part of the considerations. It is difficult to predict with certainty how employers would react to another contribution level rise in the present environment, and indeed the affordability for employees of an increase in their contributions.
As set out above there are other factors that influence outcomes. How well saver’s money is invested is also of paramount importance to whether current levels of saving are adequate.
Section 2: Outcomes and value for savers
Q3: What advice and guidance do people need when saving for retirement?
In workplace pensions, most savers struggle to engage with their pensions. Most new pension savers under AE:
This is a by-product of a system built to harness the power of inertia and as outlined earlier has led to many millions more savers putting something away for their retirement. This lack of engagement means two things for us as a regulator: AE pension schemes must deliver VfM for savers through good default funds and it is the decisions taken by others that most influence savers’ outcomes. That’s why in our corporate strategy we set VfM and scrutiny of decision-making as strategic priority areas in the years to come.
We primarily work with employers, trustees and their advisers to drive value for money and to ensure they act in savers’ best interests. We also work with organisations such as MaPS and the FCA to explore what more can be done to support savers in making sound financial decisions.
Facilitating good quality financial advice, in both the accumulation and decumulation phases of pensions, can help protect savers from the risk of being scammed, transferring into inappropriate or poor-value schemes, or making a decision that is not right for their personal circumstances. While people retiring today will typically have a significant proportion of wealth in DB pensions, that is changing as people being automatically enrolled into DC schemes becomes the norm.
We welcome DWP’s plans to require trustees of occupational pensions schemes to:
We aim to produce our own guidance too ahead of the new duties coming into force to help trustees and administrators prepare for the changes.
We strongly support innovation and initiatives which lead to savers engaging more with their pensions. As an example, Pensions Dashboards will provide a real opportunity for engagement within the pensions space and provide a tool to help pension savers plan for their retirement.
We also know that employers and trustees want to be able to do more to support their savers in making decisions, not just at retirement but throughout their working lives. Employees also look to their employers for guidance: research from CIPD[8] (the professional body for HR and people development) shows that more than half are interested in receiving support from their employers about financial issues.
Q4: Could retirement income targets help savers plan for retirement?
While individuals have their own wants and needs, we believe that retirement income benchmarks can provide a useful tool to help savers plan for retirement. The Committee will be aware that the PLSA has done some excellent work with the Centre for Research in Social Policy (CRSP) at Loughborough University in this area and keeps the figures under review.
The updated Retirement Living Standards (RLS) can provide a useful benchmark to be used alongside other tools such as Pensions Dashboards.
Q5: Apart from increasing contributions, how can the Government improve outcomes for savers?
While this is a policy question for DWP, our Corporate Strategy, which is central to how TPR as a regulator can help to achieve strong outcomes for savers through our work, lays out several areas which we believe are vital to deliver stronger outcomes, including:
We set out below three examples that demonstrate the value that our strategic priorities can add to outcomes:
Value for Money discussion paper
As mentioned in Section 1, we and the FCA published a joint discussion paper on developing a common framework for measuring VfM in DC schemes. We will publish a feedback statement later in 2022.
To allow good value schemes to compete, we are proposing a common framework for disclosing information on the key elements which make up VfM: investment performance, scheme oversight - including data quality and communications, and costs and charges.
As regulators, we and the industry must be able to effectively assess VfM to ensure good pensions outcomes. DC savers rely on the pension system working as best as it can over the lifetime of their saving - every penny counts. That's why independent governance committees and trustees need a framework which provides a holistic assessment of what VfM means - beyond cost and charges - to allow them to hold their providers to account and deliver the best possible outcomes for savers.”
In a system built to harness the power of inertia to bring savers into pensions, it is vital that the schemes people are saving into provide the best possible VfM. This is a view shared by the Institute of Fiscal Studies, which in a report[9] published in February warned pension savers who do not move older DC pots into ones offering better value for money could be thousands of pounds worse off.
DC savers can only maximise their retirement income if their scheme delivers VfM. For the regulators, this means well-run schemes delivering good investment performance that is not eroded by high costs and charges.
DC Consolidation:
We recognise that DC consolidation provides opportunities for better outcomes in terms of governance, administration, and value for members. We continue to work with schemes, using a risk-based approach. Since the Master Trust authorisation and supervision regime was introduced under PSA 2017, the number of Master Trusts has reduced from 90 to the current 36, and this is expected to drop further as schemes continue to consolidate.
As part of the DWP’s Improving Member DC Outcomes work, DC schemes with less than £100 million assets under management must now carry out a more rigorous VfM assessment and report the outcome to us via the scheme return. We will be working to ensure that trustees of schemes that do not offer value either wind up and move their members to an alternative arrangement or make improvements to the existing scheme.
We also believe the pension industry still has much work to do to build resilience and assess climate-related risks and opportunities. In our climate adaptation report, published in October last year, we made clear that too few schemes give enough consideration to climate-related risks and opportunities, which means investment performance and saver outcomes could suffer.
Decision making:
Diverse groups make better decisions on areas such as climate change risk. It is essential to ensure all savers get the retirement they are planning for. Well-run schemes are those that have access to a wide range of perspectives, knowledge and skills, where everyone has equal opportunity to contribute and challenge from different perspectives.
Trustee boards which are not diverse risk knowledge gaps, entrenched ideas, biased thinking and poor decision making which puts savers at a disadvantage. We are leading an Industry Working Group to tackle the barriers to diversity and inclusion across the industry.
Q6: Can pension providers change the design of pension products to improve outcomes for savers?
TPR welcomes and encourages innovation in workplace pensions. Changing the design of pension products to improve outcomes for customers would be in keeping with our aim ‘to put savers at the heart of all we do’.
One of our corporate strategic priorities is to embrace innovation. We will encourage innovation, facilitating the development of technology and sharing of good practice, and collaborating with the market to encourage security, efficiency, transparency, simplicity and choice.
Our focus on innovation includes emerging scheme models: we will continue to work with the market on the development of DB alternatives to ‘traditional’ schemes as well as on the development of decumulation products and the establishment of Collective Defined Contribution schemes in the DC sphere. We expect extensive, continuing change in the pensions marketplace and as we evolve, we will continue to balance our resources to intervene where we can have the greatest impact on saver outcomes.
While we welcome the introduction of emerging models to consolidate DB schemes, such as superfunds, we recognise that these models can incur risks for members. This is why we launched our interim regime for superfunds, which sets out high standards for governance, funding, and in respect of those setting up and running superfunds.
In this area we also commend the work of the ‘small pots’ working group and the success in getting a positive change in charges on small pension pots valued under £100.
We have a strategic priority to scrutinise those who make decisions on behalf of savers but that also includes supporting savers with decision making. That is why, in our joint consumer journey work with the FCA, we explored the factors that help savers make decisions to help meet their retirement goals.
Our consumer journey work with the FCA will also provide important insights in this area, such as:
Section 3: Self-employed, the gig economy and closing the gender pay gap
Q7: What should the Government be doing to support self-employed people to save for retirement?
While self-employed people do not strictly come under TPR’s remit, we are aware that DWP officials are working to develop and test solutions for those self-employed individuals who are at risk of under-saving to establish what works at scale to normalise pension saving amongst this group.
Our joint work with the FCA on the consumer journey shows that different types of employment affect pension saving behaviour and self-employment leads to a different pension journey for consumers. ONS data shows that self-employment is increasing in the UK[10], with 4.3 million self-employed people in the UK in 2020, up from 3.2 million in 2016. How people are employed has also changed, with an increase in multiple short-term employments, zero hours contracts and the rise of the ‘gig economy’ 3% of people in employment were on zero hours contracts in the three months to December 2020, up from 0.8 percent in the same period in 2012.
However, the number of self-employed workers contributing to a private pension has been steadily declining since the 1990s. Non-workplace pensions play an important role in ensuring that more people have access to a pension product, regardless of their employment type.
The research also shows that people are changing employer more frequently and are increasingly moving between employment types over the course of their working life. Many who are currently self-employed, will previously have been enrolled in, or offered, a workplace scheme at some point. This creates the challenges of multiple and often small pension pots, and ensuring that self-employed people continue to engage and contribute to a pension.
The Committee will be aware that following the 2017 AE Review, DWP is now looking at what barriers exist that may prevent the self-employed putting their money into a pension and what could be done to make it easier for them to do so.
Fundamentally, we agree with the sentiments set out by the Government in their 2017 AE Review, and would be welcoming of innovation in the sector that ensures savers are protected and put first.
Q8: Are different or additional measures required to help gig economy workers save for retirement?
The gig economy is set to grow further as the UK emerges from the pandemic and businesses recover. We are calling on all who engage individuals in the gig economy to step up and do the right thing for their staff and put them into a workplace pension so that they receive the benefits they are entitled to.
It is only right that all who work in and contribute to the economy have the opportunity to save for the retirement they want.
The Automatic Enrolment legislation provides that anyone who meets the definition of ‘worker’ is in scope for automatic enrolment. A worker is defined (section 88(3) and (4) PA08) as any individual who:
Someone working in the gig economy will be included in AE if they meet the definition of worker and the age and earnings criteria.
While we acknowledge Uber’s commitment to putting their staff into a workplace pension following a [11]Supreme Court ruling, we want to see all who engage individuals in the gig economy comply with their responsibilities voluntarily and promptly, not on a case-by-case basis.
Where staff are workers, we will expect companies to automatically enrol them in line with the law.
Being a ‘worker’ also gives rise to wider employment law rights and protections. Determining employment status correctly is therefore key for gig economy companies. We monitor developments in this sector, which is highly diverse and continually evolving, and will take enforcement action when we consider there are individuals with “worker” status who are not being automatically enrolled.
We welcome proposals which will see the age threshold reduced so that younger people can start saving sooner, and we expect the growth in multiple short-term employments, zero hours contracts and ‘gig economy’ work will be concentrated particularly among lower-income Generation Z savers. Although most will at some point be automatically enrolled, these savers will typically make the statutory minimum level of contributions and their more erratic employment patterns could make pension saving a challenge.
Q9: Are there measures which the Government should consider to close the gender pension gap?
While we have come a long way, we know there is more to do to ensure we, as regulators and as an industry, provide better retirements for all savers.
We know for example that while the number of women saving into a pension is equal to the number of men, women are not saving as much.
Last spring, together with the FCA we called on industry, consumers, consumer groups, employers and trade bodies for their views on how consumers make decisions about their pensions at key points throughout their working lives.
Structural issues within society, such as women being more likely to take career breaks, earn less over their working lives and live longer, all contribute to the gender pensions gap, and are a question for Government.
Our work on Equality, Diversity and Inclusion
Understanding these issues and in particular seeking views on how the pensions consumer journey can be improved to address poor outcomes due to structural issues within society will help regulators bring forward interventions which will help all savers make informed decisions about their retirement.
This includes identifying the best points at which to offer consumers support, knowing who is best placed to provide support and how this can be done. Earlier this year we launched our Equality, Diversity and Inclusion Strategy which set out ambitious targets to tackle inequality among savers. As part of this strategy, we set up an Industry Working Group to look at ways of creating more diversity and inclusion on trustee boards so that the needs of all savers are represented.
Our Equality, Diversity and Inclusion Strategy sets out a vision of building a workplace pension system that works for everyone. To deliver on this we have identified three strategic aims between now and 2025:
Conclusion
We welcome the committee’s thorough focus on another important area. The submissions to this stage of the inquiry will undoubtedly help to further the debate on such a vital issue affecting both savers and pensions in general.
Our Corporate Strategy sets out how we are seeking to address the changing pensions landscape. We recognise the need to focus on younger savers, and ensure employers are considering the benefits and value of choosing certain schemes for their staff.
We have been closely liaising with organisations in the sector to improve outcomes for savers through projects such as our joined up working on value for money with the FCA and we welcome any innovation that puts the saver first.
Ultimately the implementation of the AE 2017 changes is a matter for Government and Parliament, and we look forward to progress being made ahead of proposals taking effect from the mid-2020s. We as a regulator stand ready to play an active and constructive role in the development of any proposals.
February 2022
[1] DC trust: scheme return data 2021 to 2022 | The Pensions Regulator
[2] Consumer Journey call for input (now closed)
[3] Corporate Strategy Pensions Future | The Pensions Regulator
[4] compliance and enforcement bulletins
[5] What can other countries teach the UK about measuring Value for Money in pension schemes? 20211118-ppi-value-for-money-exec-summary.pdf (pensionspolicyinstitute.org.uk)
[6] Master Trust Default Fund Review: Hymans Robertson - Master Trust (readymag.com)
[7] PLSA Retirement Income adequacy: generation by generation
[8] https://www.cipd.co.uk/Images/financial-well-being-why-its-important-report_tcm18- 17441.pdf
[9] https://ifs.org.uk/publications/15922
[10] Employment in the UK: November 2020
[11] https://www.supremecourt.uk/cases/docs/uksc-2019-0029-judgment.pdf