On 16 October, the Pensions Regulator launched a discussion paper on its new 15 year corporate strategy in which it emphasises that its main objective will, unsurprisingly, be to protect pension scheme members and their saving outcomes. However, somewhat surprisingly, it says very little about the Regulator’s role in supporting the economic recovery by promoting the sustainable growth of DB scheme sponsors in the coming years.
The Regulator’s strategy reflects the shift in retirement provision that will take place over the coming years, with individuals retiring today receiving the majority of their benefits from defined benefit (DB) schemes while those retiring in future years will be increasingly reliant on savings in defined contribution (DC) schemes. This shift will see a change in focus for the Regulator from its current predominantly scheme-based approach to one that centres on the saver.
The Regulator is asking for views on strategy outlined in the discussion paper by 16 December 2020 and a series of roundtables are planned for the Autumn. It then plans to publish the final version of its corporate strategy in the New Year.
Recognising the changing patterns of pension provision, the strategy analyses the needs and challenges facing different cohorts of savers including Baby Boomers, Generation X and Millennials. The paper sets out the key risks, challenges and opportunities each generation faces. For example:
- Whilst Baby Boomers have typically built up pensions in DB schemes, members of Generation X and Millennials are more likely to have retirement savings in DC schemes. Consequently, a key concern for Baby Boomers is ensuring that DB schemes are adequately funded to reduce the risk of them falling into the PPF. In contrast, for those in Generation X and Millennials, the Regulator’s focus needs to be on maximising employer compliance with automatic enrolment and ensuring DC schemes are well run, deliver good outcomes and provide value for money.
- Generally speaking, Baby Boomers are more likely to have built up a decent level of pensions savings, meaning the focus will now be on ensuring security and value. In contrast, Generation X are likely to have smaller pension pots, that are unlikely to meet their full income needs on retirement. In addition, this so-called “sandwich generation” are expected to reach retirement supporting both their children and their parents. Therefore, the focus for Generation X will be boosting engagement and promoting participation whilst ensuring that savers get value for money from their pensions.
- A key objective for the Regulator across all generations is to boost transparency and understanding of the pensions market. Baby Boomers face the challenge of navigating the complex retirement market, and a key risk for this group is falling victim to a pension scam. Therefore, the Regulator will seek to enable good saver decision-making by increasing transparency and protecting savers. Auto-enrolled Generation X savers are generally less likely to engage with their pensions than Baby Boomers. The Regulator believes this is due to the lack of transparency and the complexity of pensions. Therefore, it proposes to help boost engagement by taking steps to drive greater transparency and simplicity. Finally, the Regulator believes that technology and innovation will play a crucial role in driving participation and improving understanding, particularly among members of Generation X and Millennials.
Different needs by income level
As well as comparing the needs across generations, the paper also analyses the challenges and needs faced by individuals with different income levels – high, medium and low – within each generation. This indicates that:
- in all age groups, low income earners are unlikely to have much, if any, pension savings, will be heavily reliant on the state pension and are likely to have high levels of debt
- whilst high income Millennials will predominantly be saving in master trusts, middle to low income Millennials may have more limited pension savings and are likely to be more reliant on housing wealth to fund their retirement, and
- whereas high income Baby Boomers are likely to be targets for scams and mis-selling, middle to low income Baby Boomers may not have even thought about retirement and many can be expected to rely solely on the state pension.
The Regulator’s key strategic priorities
In light of this analysis, the discussion paper outlines the Regulator’s five strategic priorities, which will form a core part of the Regulator’s annual three-year corporate planning going forward. These are:
- Security – The Regulator’s primary goal will be to protect the money savers invest in pensions. In the early years of the strategy, the Regulator will continue to focus on protecting the promises made to members of DB schemes and protecting pensioners from scammers. Over time the focus will shift to DC schemes to ensure that they are secure and provide value for savers.
- Value for money – In terms of value, the Regulator expects to see members’ savings suitably invested, with schemes levying reasonable costs and charges and delivering efficient services and administration. It will also look to drive consolidation where this is in savers’ interests.
- Scrutiny of decision making – There will be an increased focus on managing savers’ exposure to economic and environmental, social and governance risks, as well as promoting diversity among decision-makers and ensuring that decisions that affect savers are fair and transparent.
- Embracing innovation – The Regulator expects the market to evolve and keep pace with savers’ needs. It will encourage innovation and good practice, collaborating with the market to enhance security, efficiency, transparency, simplicity and choice.
- Bold and effective regulation – The Regulator will maintain a ‘sharp focus’ on bold and innovative regulation to deliver its commitments to pension savers. It says it will “transform the way [it] regulate[s] to put the saver at the heart of [its] work, driving participation in pensions saving and enhancing and protecting savers’ outcomes”.
The Regulator’s analysis of the changing needs of pension scheme members and savers shows how its priorities will need to change in the coming years.
Whilst the focus on protecting and enhancing outcomes for members is understandable, we would have expected the Regulator to say more about its role in promoting the sustainable growth of scheme sponsors in light of the unforeseen and significant economic impact of Covid-19. We hope that this point will be addressed in the final version of the strategy.
We would also like to see more on the Regulator’s plans in relation to ESG and climate-related risks, given the increasing focus on this, and also on its role in encouraging innovation in the decumulation options made available to DC savers which will become increasingly important in the period covered by this strategy.
Finally, as the Regulator’s focus on DC pensions increases this is likely to intensify calls for a single regulator for all DC pension savings.