The joint HM Treasury/Department for Work and Pensions minister Emma Reynolds is leading the review. This is the first time that there has been a joint HM Treasury/Department for Work and Pensions minister. This new role has been created to tackle the twin challenge of productive investment and retirement outcomes.
As already mentioned, the first phase of the review will focus on investment. The intention is that a report of initial findings will be shared later this year, ahead of the introduction of the pension schemes bill.
The second phase, which is expected to start “later this year”, will consider, alongside investment, further steps to improve pension outcomes.
The government has indicated that the pensions review will also assess “retirement adequacy”. In outlining its policy remit in the terms of reference, the first “investment phase” of the review will focus on developing policy under four areas:
- driving scale and consolidation of DC workplace schemes;
- tackling fragmentation and inefficiency in the LGPS through consolidation and improved governance;
- the structure of the pensions ecosystem and achieving a greater focus on value to deliver better outcomes for future pensioners, rather than cost; and
- encouraging further pension investment in UK assets to boost growth across the country.
According to the government, in developing its recommendations, the review will have regard to boosting the returns of pension savers and improving the affordability and sustainability of LGPS funds in the interest of members, employers and local taxpayers.
Consideration will also be given to the role of pension funds in capital and financial markets to boost returns and UK growth, as well as any implications for wider government financial stability policy objectives, such as with respect to the gilts market.
The review will further consider fiscal impacts, which will need to be considered in the context of the public finances, and progress already made on “in-train policy initiatives” such as the “value for money framework” and other live reform programmes.
The government is keen to canvas external viewpoints including from employers, trade unions, the pensions industry, financial services, local government and consumer voices.
Is this all a good idea?
Any consolidation of DC schemes is likely to be through DC master trusts, which are trust-based arrangements. Currently, trustees of such schemes have various legal and fiduciary duties, including diversifying investments and acting in the best (financial) interests of their beneficiaries.
This means, to enable the government to determine how trust-based DC pension schemes and the LGPS will invest, a bit more of a fundamental overhaul of the legal framework governing such schemes will be needed.
Depending on what types of investments are recommended for investment in the UK, tension could potentially arise with the duties of trustees of trust-based DC pension schemes. This is especially true in relation to riskier, albeit potentially better-performing, investments in the long term.
Risk appetite — the level of risk that decision-makers are willing to accept while pursuing their objectives — is subjective. It will therefore depend on the specific circumstances of each individual scheme, which may make it difficult to impose a universal, one-size-fits-all system across the pensions board.
