21 March 2021
Henry Tapper, chief executive officer of AgeWage, outlines a significant and imminent development
Many readers will have joined their first employer with the promise of a ‘company pension’. If you can admit that was before the end of the last century, typically the promise meant a wage for life in return for lifelong service to that employer.
But, for reasons this article won’t go into, that promise from your employer if you are working in the private sector is more likely to be that you will be eligible to participate in the workplace pension designated by your employer. In practice, that pension is most likely to be run by a commercial organisation like National Employment Savings Trust or Lifesight or People’s Pension over which your employer has very little influence.
The main levers left for employers in the corporate sector are with payroll professionals who manage the compliance with auto-enrolment regulations and act on instructions from employer and staff on matters such as salary sacrifice.
That this radical change has happened in little more than a quarter of a century is one of the most radical shifts in labour relations since the second world war. Many are now looking back at the era of ‘defined benefit’ pension provision as an aberration; and certainly the cost of promises made in the twentieth century are resented by many senior executives who see their pay and conditions denuded of such generous retirement provision.
But the shift from company to workplace pension is only partial. There is a hybrid type of company pension run by many employers which has all the governance of a defined benefit scheme in terms of trustees and regulation, but which offers no promise other than that of a defined contribution (DC). Many of these DC pensions sit within the trust structures set up to pay defined benefits, some are quite separate schemes, but these are now coming under the scrutiny of a government keen to improve value for members.
The Department for Work and Pensions (DWP) and the Treasury see the cost of running these schemes as potentially detrimental to member outcomes. Put simply, if employers wound up their own trusts and paid money directly into multi-employer schemes (known as ‘master trusts’) members would get bigger pension pots providing them with better retirement outcomes. Government sees itself as justified in intervening in the way employers in the private sector manage workplace pensions because they are acting for the tax-payer who is typically both the beneficiary and the funder of these pensions. Government – on behalf of the tax-payer – boosts pensions with various incentives, most notably the grant of tax relief on contributions.
...accelerating the consolidation of DC company pensions into master trusts.
For two years, the DWP has been running a consultation on how to improve member outcomes in occupational DC schemes and has concluded that this can best be done by accelerating the consolidation of DC company pensions into master trusts. This, they say, would reduce overall costs of running individual trusts (each with its own set of advisers) and improve the terms that members could receive on their accumulating pension pots.
There are two further advantages. The first is that large occupational schemes can better meet the immediate challenge of funding the infrastructure needed to build back Britain after the pandemic. The chancellor in this year’s Budget explicitly pointed at our workplace pensions as a source of finance for enterprises and infrastructure historically funded through private equity and the private finance initiative. Government sees large workplace pensions as picking up the strain and is prepared to shift the goalposts of the charge cap to allow large schemes to invest in such projects.
The second is that large schemes may have the capacity to pay pensions rather than just provide their members with pots which members have to convert to pensions using income drawdown or annuities. This payment of pensions involves people exchanging their pot for a promise of a ‘wage for life’ paid from a collective pot. This collectivisation of DC pensions is known as collective defined contribution.
The DWP is looking to force the pace of change by introducing, from this October, new rules on trustees of DC company pensions to justify their existence. If they have less than £100,000,000 in them, they will have to prove to themselves and the Pensions Regulator that they are delivering better value for their members’ money than could be had from a large ‘consolidating’ master trust or even an insurance company’s group personal pension.
This looks like being a fraught business, with many companies that have invested in the concept of running a company pension being required to give up their own arrangement. But in finance, as in most things, God seems to be on the side of the big battalions.
Featured in the April 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.