Pensions in 2035: Peering into the crystal ball

Given the introduction of the concept of the lifetime pension pot system, what does the future hold for the UK pensions system? Let’s take a leaf from the book of Charlie Brooker, and take a Black Mirror-esque leap forward……

The year is 2035. Liz Truss is back, Donald Trump has taken it upon himself to abolish the two-term presidency rule, and Vladimir Putin is still the biggest menace to the western world – and eastern, for that matter.

Society is fully cashless, physical bank branches are a distant memory and crypto is king. The NHS collapsed at the turn of the decade, the Westfield Shopping Centre in west London has been converted to social housing, and kids think terrestrial TV was something to do with aliens.

Drastic changes have also been made to the UK’s pension system, and we have now adopted the lifetime provider or ‘pot for life’ model. But how does this look – and have we learnt anything from the Australian system?

Employers

The role of the employer in pensions has changed seismically in a decade. The lifetime model essentially removed employers from the pension decision-making process, putting the onus entirely on the employee.

Employers must still choose the right default provider in the absence of an employee decision, which keeps a level of fiduciary responsibility, but their governance has plummeted. At the basic level, employers just need to pay their contributions and facilitate employee contributions.

However, the workforce is increasingly made up of workers over 50, providing businesses with a challenge to recruit and retain older employees. Pensions are at the forefront of people’s requirements when considering remuneration packages.

As a result, good employers see pension provision more as a strategically important employee benefit and pay higher contributions as a result, and the best use auto-escalation – that is, an automatic increase in contributions with length of tenure – inspired by its success in the US.

Alongside this natural shift, there’s far greater regulatory pressure, which has made employers address pension gaps, across gender, ethnicity, disabilities, and anything that could be a discriminating factor. As a result, contributions are higher for things like parental leave.

Providers

The Department for Work and Pensions and the regulators have finally got their wish of a more simplified pension system.

The 2035 lifetime provider landscape now consists of a handful of behemoth master trust providers, which qualified to receive contributions through a clearing house.

Over the past decade, these trusts swallowed up many smaller ones along the way and all look similar – consisting of similar administration systems, investment solutions, operating models and products.

There has been a huge increase in direct-to-consumer marketing activity, as each provider spends millions on advertising, branding, and sponsorship. Liverpool Football Club has one master trust on its kit, and Manchester City another. Savers are as loyal, and divided, as sports fans.

While this spend is regulated, it brings an opportunity cost, with less money to spend on innovation to improve member outcomes.

We now also see providers doing more – beyond financial performance and marketing – to hang on to clients for as long as possible. Virtual reality retirement communities have launched, where people have access to forums and advice, and can interact with other users and experts.

Retirees also have access to flexible benefit schemes via their pension plan membership. Master trusts have taken advantage of economies of scale to source insurance and other benefit products at competitive prices, so people can continue to be covered after they leave employment.

Beyond master trusts

There have been considerable implications for retail pension providers. Looking around the market, there are only a handful of group personal pensions, and the self-invested personal pension (SIPP) market has become even more regulated.

Retail providers that spent a decade focusing on innovative products and finding smart ways to deliver value successfully drew members away from the master trusts.

SIPPs offer a place for people who like to invest outside of the homogeneous master trust market. They still have a role to play due to the loosening of shackles that previously bound workplace pensions to employers.

They are attractive to high-net-worth individuals, especially where platforms allow individuals to manage wealth holistically across tax wrappers. However, this is predominantly in the at-retirement space. SIPPs have far less traction with members in the accumulation phase.

Investments and costs

In this new world of bigger consolidated pots, 2035 has offered pension funds a better opportunity to invest in illiquid assets such as infrastructure without unreasonable risk to members.

As a result, we have seen a dramatic improvement in infrastructure investment opportunities. A decade ago, UK infrastructure was an international playground. Now, slowly but surely, UK schemes have been buying back UK assets – but there’s a long way still to go.

Separately, we’ve finally seen the ‘death of ESG’ – and not the way some may have been hoping for. It’s no longer talked about as a ‘concept’, but instead is the bare minimum industry norm. Increased visibility on a smaller group of pension providers has left nowhere to hide.

These are of course positive shifts, but they come with a cost – literally.

The days of defaults running with a sub-0.3% annual management charge are a distant memory. Given the added complexity and higher costing assets, we’re looking at annual fees of 1.2% or more across the industry.

At least this has come with better measures of value for money: individual consumers have, mostly, been happier to bear the higher charges because these have been commensurate with the long-term returns the illiquid investments produce.

At retirement

The at-retirement landscape in the UK in 2024 was a mess and required radical change and the lifetime model has been one of the key catalysts.

Solutions at retirement are now a lot more sophisticated as well as user-friendly, putting the consumer at the forefront of thinking. With the pensions dashboard launched and embedded at last, we’ve seen much more effective, transparent, and accessible ways developed for people to visualise their retirement income.

As for the state pension, the current format is now untenable, and the government has introduced purely a means-tested system. This means that 50% of the population is now ineligible for the full amount.

Technology and regulation

Technology continues to be at the forefront of change, meaning consumers now have much better visibility of their pensions. Artificial intelligence is embedded in services to help people make better, faster decisions as well as offer easily accessible advice. 

Regulatory reform has led to a looser approach to guidance versus advice, although this still needs to balance with Consumer Duty. Pensions information is now much more accessible for all users, with a focus on what retirement means from an overall perspective (health, wealth and purpose).

This requires more flexibility and easy access to all relevant communications material, as well as better safety nets for people unwilling or unable to make decisions without support. Information is provided in real time and people who want to make changes simply need to speak instructions into their phone. Gone are the days of staring at incomprehensible graphs on screens.

Products

Longevity pooling products have effectively replaced annuities. There has also been a major increase in people drawing income from their homes, so more home equity products now fall inside the pensions framework.

Default investment funds have also become more inclusive. These are no longer built as a catch-all, assuming a linear working pattern for all, and instead better serve people on lower incomes and those who take career breaks.

There are even default vegan funds, LGBTQ+ funds, and funds designed for those targeting ‘FIRE’ - financial independence, retire early. The use of alternative assets providing stable, longer term, returns without the need to de-risk is much more prevalent, ideal for those making fewer regular contributions and with an unknown retirement date.

Has it worked?

There’s no doubt that the lifetime model has brought seismic change. It quite simply had to if it was going to work. But unfortunately, no government in the past decade has been bold enough to fix the right problems with the right solutions.

Even with the right clearing system, new products, worthy providers, and better investments, the ‘pots for life’ model hasn’t tackled the core issues which made up the UK’s looming pensions crisis.

Contributions are still much too low. Vast numbers of people in their 40s and 50s are still renting, leaving them set for extremely high costs in retirement and no home equity to lean on. People are starting to retire on defined contribution pots worth next to nothing, and there is still widespread apathy in the face of the ticking timebomb that is mass pensioner poverty.

The ‘pots for life’ solution has directly solved none of these problems – and the government has no real moves to solve them independently either.

There was an opportunity in 2024 to go ‘all in’ with pension reform, with higher contributions, auto-escalation, tackling housing affordability and creating genuine engagement and enthusiasm about saving for retirement.

Despite putting many eggs into the ‘pots for life’ basket, the decision-makers of 2024 failed to defuse the pensions timebomb. This has now exploded, and the industry is asking the same question: will the 2035 Budget legislate at last to increase default contributions?

Paul Leandro is a partner at Barnett Waddingham. Pensions Expert provides no guarantees about the accuracy of his predictions.