Nelson Mandela famously said: “Education is the most powerful weapon which you can use to change the world.” In today’s pension’s landscape, financial education has also come to be of paramount importance; this could be one of the key takeaways from the recent The Pensions Regulator (TPR) and Financial Conduct Authority (FCA) consultation on regulating the pensions and retirement income sector, due to be published this autumn.
Recent years have seen significant changes to the pensions landscape. Freedom and choice, under which an estimated £10 billion a year is currently flowing out of defined benefit (DB) schemes, according to research published by JLT Employee Benefits in January 2018, and the success of auto-enrolment, which will soon see its 10 millionth saver, have continued the industry’s evolution towards an ever-increasing defined contribution (DC) focus.
With that change has come new challenges, including from a regulatory perspective. The FCA, which has historically focused on contract-based arrangements such as DC pension schemes, and TPR, which historically focused on occupations arrangements, such as DB schemes, recently acknowledged the increased overlap in their roles, and consulted on how they might work more effectively in future, to make sure schemes are well run, safe and offer value for money. This consultation closed in June 2018.
A key joint regulatory role is to facilitate confidence in the pension system. Many responders will have focused on the challenges of pension scams, which will increasingly need the FCA and TPR to work together in real time, rather than using the retrospective approach that has been adopted until now. Continued vigilance in compliance with automatic enrolment requirements will also be key, especially as contribution rates rise.
However, beyond these regulatory remits, challenges are likely to remain. The consultation noted accurately that the biggest potential harm in the sector is the prospect of people not having adequate income, or the level of income they expect, in retirement. Yet a key area of concern, the level of funds currently building up in DC schemes, was not directly addressed.
There is a worrying possibility that many employees currently contributing to DC schemes at auto-enrolment minimum levels believe that this, in combination with state pensions, will be sufficient to meet their retirement expectations. In reality, this is unlikely to be true in a large number of cases. In addition, for younger employees, competing savings needs are increasingly a problem. Even in more generous pension schemes there is evidence that many young people often choose to forgo higher matching employer contributions to focus resources on other priorities, such as house deposits, student loans or other spending.
Solving these challenges is likely to need distinct 'supply-side' and 'demand-side' responses.
Focusing on supply, this is in part reliant on government policy. One option could be to develop more joined-up savings vehicles that could help square the circle; for example, an approach could be to build on Lifetime isas (Lisas) by allowing employer pension contributions to be used in a limited way to fund house deposits. Arguably this would mirror, on a far smaller scale, what is already possible under freedom and choice, where mortgages are regularly paid off from pension savings.
On the demand side, recent trends suggest that financial education is key to ensuring people save enough into their pensions. At present, employers are increasingly trying to help employees by offering financial education and guidance during their working lives, in addition to at-retirement advice for older employees. While this is an encouraging trend, given the increased burden on individuals to make pensions decisions, this support needs to step up considerably, particularly in the accumulation phase.
As regulators look to define their roles in the future, helping to facilitate this education could be a key step in improving retirement outcomes.
Steven Taylor is director in the pension consulting practice at PricewaterhouseCoopers (PWC)
