As change ripples through the pensions sector, Vidett, the UK’s leading professional trustee firm, outlines some key transformations that companies, pension schemes, and trustees could face in the coming year.

1. The general code of practice: Pension schemes will need to prepare for the much-anticipated arrival of The Pensions Regulator’s (TPR) general code of practice which will be introduced from 27 March.
2. Professional trusteeship mandate: Could we see the need for professional trustees to be appointed to all schemes? It would mark an industry-wide shift if we do – and drive the need for the recruitment of even more professional trustees.
3. EDI focus: We think TPR will advance its equality, diversity and inclusion (EDI) strategy, gathering more EDI data and perhaps even mandating evidence of embedded EDI practices from all schemes by the year end.
4. Emulating Australian super funds: With Australian super funds typically outperforming UK pension funds[i], we think defined contribution (DC) master trusts are likely to mirror their success by embracing technology and refining their investment processes.
5. TPR and FCA merger: We predict 2024 will see a move towards the merger of TPR and the Financial Conduct Authority (FCA) to create a single, unified regulatory body for the pensions industry.
6. Refined value for money (VFM) framework: If this merger goes ahead, we are likely to see clearer and more targeted VFM frameworks.
7. Evolution of chair’s statements: In 2024, chair’s statements could become shorter or non-mandatory, changing reporting requirements.
8. More environmental and climate-based decision making and focus for all schemes: Across all pension schemes, we predict greater focus on incorporating environmental, social, and corporate governance as well as the climate and nature related taskforces.
9. Single statutory objective: 2024 could witness the introduction of a single statutory objective for DC retirement provision, encompassing accumulation and decumulation and a targeted retirement income.
10. Technological integration: We believe there will be increased reliance on technology, potentially leveraging applications to ensure more streamlined pension-related processes.

 

In an ever-evolving landscape, Vidett is ready to help schemes address the changing demands and expectations of the pensions industry in 2024.

[i] https://www.ft.com/content/496f4783-5b00-4f71-946f-bfbcd29e83b5

The UK has retained a top 10 spot in the Mercer CFA Institute’s Global Pension Index.

The research includes 47 pension systems covering 64% of the world’s population and benchmarks each system using more than 50 indicators including sub-indices of adequacy, integrity and sustainability. The UK’s pension system has been ranked as the 10^th best system in the world, while the Netherlands, Iceland and Denmark took the top three spots.

Stuart Price, Partner and Actuary at Quantum Advisory, says: “The UK has maintained its position in the top ten of the index. However, this ranking places it mid-table compared to pension systems in other developed countries.

“With an ageing population and a diminishing workforce, the UK is facing a ticking timebomb when it comes to funding retirement. As an industry, we need to work on getting people clued up about their pensions and the options available to them, or we risk a very uncertain future.

“The state pension, workplace and private pension arrangements are the main feeder for income in retirement. As the state pension can be changed by the government at any time, workplace and private pension saving is crucial to allow people to retire at a reasonable age with a decent level of income.

“However, savers are in a difficult situation. The decline in defined benefit pension schemes, usually the gold standard for individuals, is having a long-term impact on retirement savings and not enough is being saved in defined contribution pension schemes which have replaced defined benefit schemes.

“The UK could follow the example of other top 10 countries in the index and begin to embrace the collective defined contribution scheme which is prevalent in Denmark and is also in use in the Netherlands alongside a strong defined benefit pension system. The concept for the collective defined contribution scheme was introduced in the Pension Schemes Act 2021. It pools member and employer contributions together in a collective fund with shared investment and longevity risks, providing the potential to earn more than through traditional pension arrangements. As a good halfway house between defined benefit and defined contribution schemes, it has the potential to really help up our pensions game as a nation.”

A pension is one of the biggest investments most people will ever make. However, a YouGov survey, commissioned by the National Pension Tracing Day campaign, reveals that while 95% of Britons who’ve owned a car can recall the model and brand of their first motor, less than half (44%) can remember the company that provided their first pension.

Lost pensions – a growing Issue

The survey of over 2,000 people also reveals a concerning trend in the management of pension pots.

A significant 78% of respondents who have a pension plan have accumulated between 1 to 3 pension pots in total, with 6% having 4-6 pots. However, 16% don’t even remember how many pensions they have.

This lack of awareness could be contributing to the growing number of unclaimed pensions, which has surged by over a third to approximately £27 billion since 2018.[i]

The National Pension Tracing Day campaign aims to change this and reunite people with their lost pensions.

Alan Morahan, Chief Commercial Officer at Punter Southall, said: “The fact nearly everyone can remember their first car but not their first pension supports what most of us already know: making people more interested in their pensions is really tough, even if it means finding thousands of pounds you didn’t know about.  Around one in 20 people in the UK may have lost pensions, estimated to be worth on average £9,500 each and finding them could make a significant difference to their retirement.”

Unclaimed Wealth

Despite the potential financial windfall, a staggering 86 per cent of respondents with a pension plan have not traced a lost pension. Age may be a factor, but with people not saving enough for later life, it’s one more thing people can do for themselves.

The research also found that of those British people who had/ have a pension plan:

• 41% have less than £50,000 in their pensions.
• Only 9% have between £50,000 to £100,000 saved.
• 13% have more than £100,000.
• 37% either couldn’t recall their savings or preferred not to tell us.

Interestingly, 48% of respondents who have a pension plan and who are working or retired, feel confident about saving enough for retirement which could be misplaced confidence, as the figures contrast sharply with Standard Life’s analysis of the PLSA’s Retirement Living Standards[ii] on the amount of money needed for people to achieve a comfortable retirement.

According to Standard Life, to attain a minimum living standard, individuals should amass around £50,000, while a moderate retirement standard requires roughly £285,000. For a comfortable retirement, the goal is approximately £530,000.

Cost-of-living impacting retirement plans

YouGov also found that the escalating cost of living is already being felt.

Of those whose retirement plans have been affected by the increase in the cost of living, 39% said they now need to continue working for as long as possible, a quarter (26%) believe they won’t be able to afford to retire, and another 25 per cent had wanted to retire early but now find it financially out of reach.

One remedy for boosting retirement funds is to trace and recover misplaced pensions, a solution that many overlook, with 45% surveyed saying they wouldn’t know who to contact or where to start their search, while others cited a lack of time or complexity as barriers.

The unsung solution: Government’s Pension Tracing Service

Remarkably, 83% of respondents were unaware of the government’s pension tracing service, a resource designed to assist individuals in locating lost pensions.

However, when asked what they would do with if they found £9,500, they said:

• 43% would put the money into a savings account.
• 22% would use the money to fund a better retirement.
• 20% would allocate the money towards paying their bills/ debt.
• 14% would set it aside for later-life care.

Alan said: “The survey showed that when people do uncover a forgotten pot, most opt to save it. In tough times, it’s encouraging that people still want to put by what they can for later life because, as we’ve shown, most will not have enough for retirement.

We urge people to think back and use our simple checklist to see if they might have overlooked a pension. With approximately £27 billion waiting to be claimed, it is a concrete opportunity.”

National Pension Tracing Day

National Pension Tracing Day, is a cross-industry campaign created by Punter Southall, and is supported by Aegon, Aviva, Hargreaves Lansdown, Legal & General, Royal London, Scottish Widows, Smart Pension, Standard Life, and The People’s Pension. NPTD works in association with the Pension Attention campaign.

Case study – Ceri Hatton

How tracking down six lost pensions helped me to move house

After reading about the billions tied up in forgotten pensions, Ceri Hatton cast his mind back to the jobs he’d had since starting work at 17.

Now 61, he went back over his working life and was eventually reunited with six pensions he had overlooked after using the government’s pension tracing service.

He was able to cash them in and put £8,000 towards moving house.

Ceri, who lives in Bridgwater in Somerset, said he found four pensions while the further two were identified after pension companies got in touch.

He said: “I was considering slowing down for my retirement and read about unclaimed pensions and ended up finding four pensions and two found me! They were all for quite small amounts so I cashed them in and ended up with around £8,000.

“Whilst this amount wasn’t life changing it was still a welcome surprise to receive cash I hadn’t been expecting and it’s enabled me to move house. It’s also made me realise just how important it is to keep track of these things and every week I now keep an eye on my other pensions and how they are performing.

“I found the whole experience very easy. Pension companies want you to have your money and I felt the whole journey was very positive. Everyone involved was very helpful. I’d recommend that anyone, especially those nearing retirement age who have been working all their lives, to check if they have lost a pension.

“I had worked for several companies as well as being self-employed over the years and it’s so easy to forget what you have and for that money just to disappear. I plan to retire in a few years and this little bit extra has given my finances a little extra boost.”

—

 

[i] [ii] https://www.pensionspolicyinstitute.org.uk/sponsor-research/research-reports/2022/2022-10-27-briefing-note-134-lost-pensions-2022-what-s-the-scale-and-impact/

[ii] https://www.standardlife.co.uk/about/press-releases/plsa-retirement-living-standards#:~:text=Assuming%20a%20full%20state%20pension%20is%20received%2C%20a%20retiree%20would,pot%20of%20around%20%C2%A3530%2C000.

 

 

All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2066 adults. Fieldwork was undertaken between 15th – 18th September 2023.  The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

Pensions experts are calling on people to check their workplace pensions regularly to ensure they are saving enough for their future.

Recent research by Moneyhub has revealed that a quarter of savers never check the value of their workplace pension, while 23% only check their pension once a year. A similar study carried out by Smart Pensions reported that over half of defined contribution pension holders check their pensions once a year or less and do not know if they are saving enough for a comfortable retirement.

Younger savers were more likely to engage with their pensions, according to Moneyhub, with 48% of 16 to 24 year olds and 47% of 25 to 34 year holds checking their workplace pensions on a monthly basis.

Stuart Price, Partner and Actuary at Quantum Advisory, says: “This latest research highlighting that the younger generations are becoming more engaged with their pensions is really encouraging. Now, the industry, together with government, need to keep driving this interest so that regularly checking workplace pensions becomes the norm for savers of all ages.

“The planned expansion of auto-enrolment for 18 to 22 year olds from April next year is a step in the right direction in terms of increasing employee participation from an earlier age, providing a solid foundation of saving for retirement from the start of young people’s working lives. This is an area that the pensions dashboard, when it comes to fruition, could really capitalise upon to help with further engagement.

“These changes, combined with teaching financial literacy from an early age, will aid young people on their journey to financial stability and independence. However, further action needs to be considered to reach those current savers who are not checking their workplace pensions regularly, or at all, and who may be at risk of not saving enough for a comfortable retirement.

“While education and awareness may assist, in reality what we need is people saving more. This is particularly difficult for low income earners who will have less money to save in the first place. Government could step in to legislate an increase in the minimum employee and employer contributions, freeze tax thresholds to incentivise additional contributions or set a flat tax rate of 30% for all, a radical thought which would redistribute some of the tax breaks to lower earners.”

With recent research showing the impact of the cost-of-living on people’s finances and work patterns, employers are being offered an easy way to support their employees with free communication tools, offered as part of National Pension Tracing Day on 29 October.

National Pension Tracing Day is a cross-industry campaign created by Punter Southall and backed by Aegon, Aviva, Hargreaves Lansdown, Legal & General, Royal London, Scottish Widows, Smart Pension Standard Life and The People’s Pension.

On National Pension Tracing Day people are encouraged to use the extra hour on the last Sunday of British summertime, when the clocks go back an hour, to check for pensions they may have forgotten about or lost and potentially find thousands of pounds.

 

Research from Ciphr[i]  suggests the continuing cost-of-living crisis is now affecting a greater proportion of employees with two in five working extra hours; more struggling to buy food or pay their bills, and fewer being able to afford to take sick days.

The survey revealed many have turned to their employer for more cost-of-living support, with a third (36%) of men and a quarter (26%) of women having recently requested a pay rise.

An alternative cost-free solution is for employers to encourage workers to join the #GreatPensionTreasureHunt and check if they have pension savings they didn’t know about.

 

It’s estimated one in 20 people have mislaid or forgotten a pension, with an average value of £9,500 – money which could boost the finances of  people 55 or older at what is a challenging time for many.

The amount in pots gathering dust has gone up by over a third to approximately £27bn since 2018, when it was £19bn according to research[ii] carried out last year.

 

Punter Southall’s Alan Morahan said: “We’re asking employers to get on board and join our mission to reunite people with pensions they may have lost contact with, which often happens as a result of moving house or changing jobs.

“It couldn’t be easier. Our step by step guide on the campaign website shows how, in a few clicks or a phone call, employees could have found lost pensions, potentially worth thousands of pounds.

“We’ve also created a free communications toolkit for employers to spread the word. The suite of communications can be used as a whole or individually and includes workplace posters, intranet adverts and videos, plus a ready-made email campaign.

“As the cost-of-living continues to bite encouraging employees to join in could be one of the easiest ways to support staff right now and help them find free money.”

 

Susan, a HR director, of an engineering company, did just that. She used the employer toolkit to help staff go through the steps to trace lost pensions. Two of them found lost pensions, with one of them worth £80,000, which Susan said shows the value of National Pension Tracing Day and is why her company is keen to take part again this year.

Employers can promote the step the step guide to finding a lost pension here. They can download the free communications tool kit here.

 

[i] https://www.ciphr.com/press-releases/two-in-five-employees-are-working-extra-hours-as-cost-of-living-crisis-bites/#:~:text=How%20employees%20are%20being%20affected,worries%20(down%20from%2055%25)

[ii] https://www.pensionspolicyinstitute.org.uk/sponsor-research/research-reports/2022/2022-10-27-briefing-note-134-lost-pensions-2022-what-s-the-scale-and-impact/

Written by James Duggan, Client Director, Vidett

Earlier this year we hosted our Vidett Risk Transfer Conference, bringing together industry experts. We were joined by Phoenix Group, Just and Hymans Robertson for a session on reinsurance to explore the latest trends and key things pension trustees need to know.

The market is growing, with no signs of stopping!

The bulk purchase annuity (BPA) market – whereby UK defined benefit (DB) pension schemes secure liabilities with specialist insurers – continues to expand. Predictions say the UK life insurance industry could onboard more than £500 billion of pension liabilities and associated assets over the coming decade.

When a trustee board enters into a bulk annuity transaction buy in or buy out), they’re managing risk by passing longevity, investment, inflation and interest rate exposure to the insurer. Reinsurance involves the insurer passing some, or all, of these risks on to a third party. Most common are:

• Longevity reinsurance – typically standardised with the insurer and reinsurer agreeing fixed demographic assumptions for the life of the contract in advance.
• Funded reinsurance – usually a bespoke solution, with both investment and longevity risks being transferred. A portion of the buy-in/buy-out premium received from the pension scheme is passed to the reinsurer often, but not necessarily, overseas. The reinsurer is then responsible for providing monthly benefit payments to the insurer, which are passed onto the pension scheme or (following buy-out) the pensioners directly. It is similar to the insurer entering into its own buy in arrangement.

Most insurers look to reinsure most of their longevity risk to optimise capital and manage the overall risks on their balance sheet. It enables them to price bulk purchase annuities better and increase capacity for taking on more business.

What do pension trustees need to consider?

• Pricing – reinsurance is a fundamental part of pricing for bulk annuity transactions and trustees should expect it to be a key factor. Particularly for smaller deals, insurers may have pre-agreed terms with the reinsurer which can remove some of the bespoke pricing.
• Process – insurers increasingly need to build reinsurance into their process, which can add time to completing a deal for agreeing pricing, data sharing etc.
• Security issues – trustees need to get comfortable with reinsurance, particularly funded reinsurance, as a concept and whether there are security implications to consider. A bulk annuity purchase is typically one of the biggest decisions for a trustee in the pension scheme’s life cycle, so the security of the contract is fundamentally important.

Trends in reinsurance

There are a couple of growing trends in the market:

• More reinsurers are becoming comfortable with deferred risk. A few years ago, most would look at pensioner-only deals, now the whole reinsurance market is looking at deals involving deferred members too, albeit with different levels of appetite.
• Insurers and reinsurers are interested in moving towards funded reinsurance, which can be done in lots of different ways. This prompted the Prudential Regulatory Authority (PRA) to publish a letter to bulk annuity insurers about their use of this reinsurance as it identified potential shortcomings with funded reinsurance arrangements. Pension trustees need to be aware and watch out for developments as insurers respond.

Insurers need to be selective and pick the right firm and structure for each transaction. Likewise, trustees need to understand the process and ask questions if they are unsure about anything related to pricing and reinsurance.

An evolving market that brings challenges

Reinsurance pricing is critical to the price offered to pension schemes looking at a bulk annuity transaction. It is a very competitive and evolving market with an increasing number of firms in in both the longevity and funded reinsurance space.

When obtaining insurer prices, pension trustees must check if the price of reinsurance has been factored in. Many reinsurance firms are unwilling to provide a quote for the first round of bulk annuity quotations, so they don’t often know if they’re comparing like with like.

Also, it can be challenging for pension schemes to have a clear idea of what contingencies go into insurer pricing. This is where advisers can help, deep diving into all the different areas and assumptions the bulk annuity pricing is based on to ensure trustees fully understand the quotation. This can make it easier to compare insurers and make recommendations to the scheme sponsor on who to take through to the next stage.

Pension trustees: be ready

Trustees will always want to undertake due diligence on the insurer they wish to transact with and be comfortable with the insurer’s covenant. However, looking through to reinsurance is not traditionally part of this process. For pension schemes considering a bulk purchase annuity, the larger the deal the more scrutiny is needed.

It comes back to the following three principles:

• be buy in ready
• have data ready
• be open to scrutiny

Pension trustees, along with their advisers, need to look at the deal and be confident they have done everything they can to understand what the insurer is offering and have the right protections in place. Understanding the reinsurance arrangements should form a key element of this analysis.

The prime minister has confirmed the Conservatives will remain loyal to the triple lock guarantee for at least 2024 despite calls for the ‘unfair’ policy to be scrapped. Although, the Conservatives, along with Labour, have not committed to keeping the policy if they win the next election.

The triple lock means the state pension increases each year in line with either the consumer inflation rate, average earnings or 2.5% – whichever is higher. With average earning growth at 8.5%, it is estimated the state pension could rise by over £900 next April, taking the annual total to over £11,500.

It is understood, however, that government officials are looking at using a lower figure for earnings, by stripping out the effect of one-off bonuses given to public sector workers to counter the current high levels of inflation. Such a move could bring the increase figure closer to 7.8% which the government believes is a fairer measure of general earnings growth. Critics state that the move is more about saving money.

Stuart Price, Partner and Actuary at Quantum Advisory, says: “The triple lock guarantee has always been controversial, with arguments that it is too generous and over time has become outdated and should be reevaluated. Despite growing negativity and spiralling costs to uphold, governments have been reluctant to scrap the arrangement due to the potential backlash from retired voters. This is particularly true with an election approaching next year and no party wanting to alienate the grey vote.

“While there is certainly a lack of proportion against workers – many of whom are striking for higher wages – there are pensioners that solely rely on their state pension and maintaining the triple lock in some form will ensure they can cope with the cost of living surge.

“In my opinion, from the comments we are hearing, it is looking highly likely that a review of the arrangement will be carried out by the next government – whoever they are.”