It is not every day that the topic of pensions is front page news, as Chancellor Rachel Reeves has planned for a “radical pension shake-up”, as stated in the Mansion House speech. So, what is planned and, more importantly, what does it mean for employers?
Amid the headlines on megafunds, the government has released materials looking to gather evidence on the role of employers and their advisers in achieving a greater focus on value in pensions, rather than cost. It even tests the water on a potential introduction of a legal duty on employers to consider the overall value of a pension arrangement.
While there are many employers that provide good-quality pension arrangements to their employees, this is not the case across the board. Concerns have been raised about an excessive focus on price when selecting pension arrangements. For instance, some smaller businesses may see selecting a scheme as a compliance activity and, with little understanding of pensions and investment, may negotiate based on price alone.
Since the launch of auto-enrolment in 2012, statutory duties for employers in relation to pensions have largely focused on quantity, as they must ensure a minimum total contribution goes into savers’ pots. While the law does not currently require employers to monitor quality, we have always felt that the underlying employment law duty of trust and confidence ought to ensure, to some degree, that employers reflect on whether a pension arrangement is fit for purpose.
In any event, the government is exploring a range of policy approaches to encourage employers to focus on value, including a new duty to consider the overall value of a pension arrangement used for auto-enrolment. For example, requiring employers to assess their existing pension arrangements against specified criteria. The duty could apply on a one-off basis initially, with an ongoing requirement to assess every few years.
In terms of what this means for employers, no set timings have been proposed, as the government will make a decision on whether to legislate for these changes in light of responses to its consultation and a final report due in 2025. However, it is increasingly clear that the government expects a noticeable shift, both from the pension providers and employers, from a focus on cost to value instead.
Ferdy Lovett is a partner at Sackers
