Thought Leadership

Jamie Jenkins, Head of Pensions Strategy

30th March 2017

The journey from Compliance to Engagement

If you started from scratch, youd design a retirement savings system that was practical, fair and future-proofed.
Youd only need to review it, rather than constantly rethink it.

But were not starting from scratch and there is a legacy of complicated elements to our pensions infrastructure that
have led to constant change in recent years. Some ideas are well thought-through design changes to the system
whereas others are necessitated by events elsewhere in the worlds of politics and economics.

In truth, the big ticket items are the simplification of the State Pension, the decline of Defined Benefit, the rise of
Defined Contribution through automatic enrolment, and the income flexibility now offered at retirement. You could
reasonably add tax incentives to that list and of course the increasingly role of technology.

Taking each of those in turn, the direction of travel is pretty clear.

The State Pension is now simpler, and there to provide a basic standard of living. Its communication, the transition
from old to new, the rate at which its uprated and the age at which it is paid will continue to be debated, but the
basic premise is simple; pay 35 years worth of National Insurance Contributions and you will receive around 8,000
a year at some point later in life.

Defined Benefit pensions are in terminal decline, with more now closed than open, both in terms of new members
and accrual for existing members. The recent Green Paper is not designed to reinvigorate DB; it was written to help
facilitate an ordely run-off, balancing the interests of members with the need to maintain solvency for the employer.

The new way of providing pensions is through widespread workplace DC coverage. 7.5m people have been
enrolled, making it one of the most successful policy interventions in recent times. Opt out rates remain low at
around 10%, and even a double of trebling of this in the final year would leave it well below earlier predictions.

From 55, people can access their DC pensions (including, of course, any transferred from DB) any way they wish.
Despite the headlines of billions of pounds being extracted in the first couple of years, and the larger than expected
tax-take from Treasury, experience suggests most withdrawals are sensible; usually people taking either small pots
or tax-free cash only.

Contrary to predictions of a societal spending spree on sports cars, forecourts appear to be as they were.

Beyond that, most of the changes we now see are relatively minor albeit they can be very irksome. Mention the
reduced Money Purchase Annual Allowance, the Tapered Annual Allowance, or even just the Annual Allowance,
and youll hear about the complications these bring to peoples saving ambitions and the administration headaches
for employers.

However, the agenda seems to have shifted from one of never ending structural change to one that seems to be
building on the major policy planks now in place. Between the DB Green Paper, the Pension Schemes Bill, the
Pension Regulators focus on standards of trusteeship and the Financial Conduct Authoritys drive for efficiency and
transparency, a clear theme emerges; consolidation.

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Put simply, the number of remaining open DB schemes is reducing, the number of Master Trusts offered for auto
enrolment is likely to reduce and the number of individual trust-based schemes has already come down from
around 45,000 to less than 35,000 in around 5 years.

So, despite the pension proliferation caused by five years of auto enrolment, well probably come through the other
side with fewer but bigger solutions.

Charges are lowering, contributions are increasing, governance is strengethning and investment solutions are
modernising. All of this is happening now without the need for further policy intervention, beyond what is already in
tow.

Add to that a government now somewhat engaged in the nations departure from Europe, and even the bandwidth
for changes to pensions seems somewhat limited anyway.

Tax relief will continue to attract attention as a significant expense for government, but the groundwork for a review
has already been done and many would argue its only a question of time before it is simplified, at the same time
hopefully removing many of the existing allowance restrictions.

The Pensions Dashboard marks a leap forward with technology. Viewing your pension and making changes online
is nothing new and most providers offer decent functionality in this area, but viewing everything together in one
place including State Pensions is something different altogether. It opens up huge opportunity for innovation
and, ultimately, member engagement. A 22 year old auto enrolee may not be immediately enthused at the prospect
of retirement, but they may be interested in managing a pot of wealth. Time will tell.

Perhaps we are genuinely moving into a phase of stability.

The DWPs auto enroment review is in keeping with this. It seeks to build upon the success of the existing policy
and whether its coverage should be extended and contributions increased.

Most notably, perhaps, the review also poses questions around member engagement. Perhaps we are genuinely
moving from a period where the focus was purely on compliance with pensions, to one where we recognise the
need to get people interested. This isnt simply for their own purposes in taking control, but to ensure that
employers see some return on their pensions spending.

Maybe we even start moving to a position where people learn the reference points for what a good pension scheme
looks like. Most large employers are already paying above the 2019 minimum 3% contribution, yet how many
employees recognise that and value it. In time, 3% will be compliance, nothing more.

This could be a turning point for pensions if we can move from a position of compliance to one of engagement.
Perhaps we can even harbour some optiomism that todays young workers will retire - not only with savings - but
with knowledge and confidence.