The UK pensions industry is facing its biggest shake-up since the last major reforms two decades ago. In 1987, a change in the law meant that it was no longer possible for employers to be encouraged by their employer to join an employer’s pension scheme. This change led not only over the next few years to the previously standardised defined benefit (DB) schemes becoming virtually obsolete, but to the creation of personal pension plans and consequential changes in the system.
The increased accessibility for employed people to personal pensions schemes was initially the most significant, and further changes have led to an unprecedented transformation of the shape of the UK pensions industry. Now, the government is proposing a series of reforms, due to be put into effect from 2012, which stipulate that UK employers will need to automatically enrol their workers in a company pension scheme. Employers will have the option of being able to use an existing scheme, or they may opt to set up a new scheme with a pension provider or independent trustee.
But is this really anything new? Auto-enrolment is no new feature after all, with many employers using it as a condition of employment. The impact, however, of the changes, is undeniable. A recent government report commissioned by the Department for Work and Pensions revealed that pension providers and intermediaries agreed that the reforms were being introduced into a market that had experienced significant changes. The changes in the UK pensions industry in the last thirty years have been accumulating steadily, but overall the shifts are seismic.
From a highly profitable market with complex charging structures, the pensions industry has evolved into a market with lower margins, greater competition with the merging of roles, and this has led to an increased pressure for each sponsor company and scheme to continue to run profitably. The Pensions Regulator has stepped up, offering advice to companies facing insolvency, and re-evaluating codes of practice regarding governance and administration. But the proposed solutions also reflect the problems, both latent and nascent.
A rapidly broadening marketplace brings with it the problems of an unstable market constantly in flux. Job roles within the industry are changing, some with guidance from the Pensions Regulator – the role of the independent trustee, for example, has been laid out in a Government-sponsored Code of Practice in accordance with shifts in emphasis in the industry with regard to administration – whilst others are left unclarified. Product providers’ and independent advisers’ roles are beginning to merge or compete.
With such competition emerging in the marketplace, impartiality and confidence could potentially become crucial points of contention. There is a need for transparency that will hopefully be met by the new reforms. Concern remains, however, that the financial security of millions of workers is at risk in the interim. Without clear regulations and with the market in constant flux, there is a real anxiety that the pensions crisis that has been rumbling for a number of years may still be on-going, and that aftershocks are to be expected.
