The government is seeking to build “a new pension system for the 2050s” with its reform programme that is set to transform the UK’s retirement savings system, according to pensions minister Torsten Bell.
Addressing delegates at the Pensions Management Institute’s annual conference in London last week, Bell outlined five major trends affecting the pensions sector, with the most significant being the shift from defined benefit (DB) to defined contribution (DC) saving.
While the number of people saving in DC schemes has overtaken those in DB arrangements, the pensions minister highlighted that this had also come with a transfer of investment, inflation and longevity risk from employers to individuals, which he said represented a fundamental change in retirement saving.
“Under the DB system, employers absorbed much of this risk, whereas DC members increasingly bear responsibility for their retirement outcomes,” Bell acknowledged. Expansion of the DC landscape through auto-enrolment came with increased risk, complexity and adequacy, he said.
DC pots are growing too, with the average size doubling from £4,000 in 2019 to approximately £8,000 today. The government relaunched the Pensions Commission last year to review adequacy issues and propose ways in which to improve savings and outcomes.
At the same time, the improving financial health of DB schemes was intensifying the debate around where to invest surplus cash. As Bell explained: “The deficit issue that dominated pensions policy for years is rapidly disappearing.”
Last week, the Department for Work and Pensions published a consultation on its draft rules for a surplus release regime, setting out guardrails for making payments from DB schemes to sponsoring employers and/or scheme members.
Crackdown on fraud as DC assets grow
Larger retirement pots were also likely to attract greater attention from fraudsters. Bell warned: “We should all be expecting pension fraud risk in the DC sector to rise as the incentive to defraud people increases.”
The industry must shore up its attempts to protect savers and maintain confidence in the pensions system, the pensions minister added.
He referred to new regulatory scrutiny of structures such as small self-administered schemes (SSASs). The government announced a crackdown last week on SSASs, proposing a new ‘warning flag’ for transfers where there is no clear link between a saver and the scheme to which they are transferring.
Separately, Bell also highlighted the collapse in pension saving among the self-employed – another issue being scrutinised by the Pensions Commission.
“We need to build a complete system that works for people in this new landscape.”
Torsten Bell, pensions minister
The pensions minister said participation rates have fallen dramatically over the past two decades, from around half of self-employed workers saving into pensions at the turn of the century to fewer than one in five today. “That is not what success looks like,” he said.
He noted that the UK had an unusually large self-employed population. While changes in the nature of self-employment may explain the decline, Bell said the issue would be addressed in the final report of the Pensions Commission, expected in early 2027.
The fifth trend Bell identified was consolidation across the pensions market. He highlighted the growth of multi-employer schemes, the emergence of DC ‘megafunds’, and ongoing work on small pot consolidation.
“We are well outside the world where employees knew exactly what they were being promised and didn’t need to think about it very much,” the pensions minister concluded. “We need to build a complete system that works for people in this new landscape.”
