Changes to workplace pension schemes were announced as part of Jeremy Hunt’s so-called “Statement for Growth,” during the Chancellor’s Autumn Budget speech.
Mr Hunt referred to a consultation exercise that will be organised, the aim of which is to reform workplace pension schemes. The basic idea is to give workers the right to invest toward a so-called pension pot for life using a fund of their choice.
The Chancellor told MPs: “I will also consult on giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose, meaning people can move to having one pension pot for life.”
As it stand at the moment, pension contributions are invested in a workplace pension scheme that is chosen by the employer. It means that workers who change employers several times throughout their working lives tend to accumulate several small pension pots in various schemes. This is more likely to happen in the early stages of people’s careers.
The Chancellor has now committed to holding consultations with a view to giving employees a legal right to request that their employers make their contributions into a pension pot nominated by the employee. It will help to enable employees to keep and contribute to one pension pot during their working years.
This new approach would be similar the “superannuation” system operated in Australia. The only “problem” with what has happened down under is that it has resulted in creating a smaller number of mega-funds rather than the many options that employees here in the UK have available to them.
The Chancellor is hoping to incentivise workplace pension fund vehicles so that they invest more money in the UK economy. But it is by no means certain that changing the focus of workplace pensions to create these pension funds will do what he hopes, as when given the choice of multiple providers, it might result in pots not being large enough to have a meaningful economic impact.
The government is due to introduce a multiple default consolidator model relating to eligible small pension pots – deferred contribution pension pots valued below £1,000. One drawback with this freedom of choice would be the extra administrative burden it would put on employers – a burden which could be excessive when compared to member benefits. Also, it would be easier for employees to plan for retirement if they don’t have multiple separate workplace pensions to keep track of and deal with.
Consolidating small pensions thus would lead to economies of scale which would assist with the government’s target of investing in productive finance options.
At this point in time, the government has requested evidence in the form of a lifetime pension provider model. They have also requested thoughts on a possible expansion of the function of collective direct contribution schemes (CDCs) in the future. CDCs differ from standard direct contribution (DC) pension schemes in as much as where DC schemes have individual pension pots, CDC pots are combined with those of other scheme members.
CDCs are relatively new in the UK. In fact, in April 2023, TPR (The Pensions Regulator) announced it has assessed and approved the first scheme. It is the RMCPP (Royal Mail Collective Pension Plan), which was the first to appear on TPR’s list of authorised CDC pension schemes. Prior to this, countries offering CDCs included Canada, Denmark, and the Netherlands.
There is also movement on the subject of pension decumulation. The government has confirmed that DC pension scheme trustees will be obliged to provide a decumulation option or options that offer members choices in line with current pension freedoms. Trustees must either offer options in-house or by partnering with another supplier when it comes to transferring pension schemes.
Away from the workplace pension scene, recipients of the state pension received good news in as much as Mr Hunt has confirmed the government’s commitment to maintaining the pension triple lock scheme – at least in the immediate future.
The way that the triple lock works depends on which is higher:
- The growth of average earnings from May to July when compared against the same period in the previous year.
- The average percentage increase in inflation as measured by the Consumer Prices Index in September of the previous year.
- A minimum of 2.5%.
Whichever comes out on top, is the one that will define the state pension increase. In this instance, the highest is the inflation figure.
Prior to the Chancellor’s Autumn Budget statement, speculation was rife that the government would fiddle with the numbers and use the wage growth figure of 7.8% – a figure that excludes bonuses. However, that was not the case.
It means that from the 6th of April 2024, the full new state pension will be increased by a further 8.5%. It means that the state pension will rise from its present amount of £203.85 per week, to £221.10. Pensioners receiving the basic state pension will see the weekly payment increase from £156.20 to £169.50.
Back to the private pension sector, despite the controversy of the Lifetime Allowance, Mr Hunt confirmed the government’s commitment to abolishing it from the 5th of April 2024. The allowance currently stands at £1,073,100. It is seen by some as move in favour of the wealthy, and the Labour Party have committed to reversing its abolishment if and when they form the next government.
With the next general election scheduled for the 25th of January 2025, if Labour do win, and they currently look like doing so, if the Lifetime Allowance is reinstated as promised, it will only have been in place for 9 months – in fact, the Labour Party has indicated the reversal could be backdated.
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