A view from the front line - The Future of Pensions - Eversheds Sutherland
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The Future of Pensions
Research report
A view from the front line
The Future of Pensions
A view from the front line The Future of Pensions Contents Introduction by Eversheds Sutherland 3 Innovation checklist 4 Executive summary 5 Theme One: The future of DB 6 Theme Two: The future of DC 8 Theme Three: The future of long-term pensions planning and collaboration 12 Theme Four: The future of pensions communication and engagement 16 Conclusions 19 Observations from Winmark 20 About Eversheds Sutherland and Winmark 21 Appendix 22 2
A view from the front line
The Future of Pensions
Introduction by
Eversheds Sutherland
Francois Barker,
Partner and Head of Pensions, Eversheds Sutherland
Why have we “forgotten” cohort aged 35-45 – too Four principal themes
young to have DB security but too
published this report? old to have enough time to save for The Future of Pensions is a huge topic
a decent DC retirement. There are so we have focussed on four key
The context and background for this
solutions to the problem - higher themes raised in the research exercise,
report on the Future of Pensions are
contributions, longer working lives, and on some innovative solutions
the major changes we have seen in
innovative, tailored retirement suggested for each. We comment
our industry over the last 25 years, and
products and a better understanding on each of the themes and our
the material challenges that lie ahead
of what a “living” DC pot would international colleagues offer views
for us all.
look like – but these all carry on where the UK may have lessons
In terms of those changes, we consequences. to learn about the Future of Pensions
see that: from overseas jurisdictions – or
We expect the pensions dashboard vice versa.
– private sector defined benefit (DB) to help, giving members a better
plans are largely now closed, and idea of what their retirement benefits We also include an “innovation
the Pensions Regulator (TPR) and may be – and what they should do if checklist” of ideas to make the Future
the Government are encouraging they need to save more. Changes to of Pensions a better place. These
them to work on their endgame. the auto-enrolment (AE) regime will ideas – suggested by those who
The future for most DB plans will also need to play a part here but it is participated in the round-tables and
be measured in decades but the not clear if these will be enough by in-depth interviews - are highlighted
journey will be an exciting one themselves. throughout the report, with an
with a whole host of new indication of how they were viewed
challenges to deal with Key challenges by participants in a joint survey with
Winmark.
– alternatives to buy-out are This Future of Pensions report
emerging, allowing DB plans to identifies the key challenges that plans We hope you enjoy reading the report
continue without sponsor support will face in the coming years and looks and find the "innovations checklist" a
at what action sponsors and trustees useful way to help you think about the
– many DB plans may never be able can take to make their plans fit for future of your own pension plan.
to afford to buy-out. Will we see the future. Everyone stands to benefit
new ways (like GMP conversion) from this:
emerge for them to reshape their
benefits into something more – the benefits are obvious for
affordable? members
– of course, the long term future lies – sponsors benefit too, in the form
with defined contribution (DC) of managing their workforce
plans, whether individual or around retirement and minimising
collective reputational damage
These changes come with challenges. – trustees with well-run plans will
Most immediately, the DC landscape also be less open to future
is a real concern. How do we get challenge that they could and
people to save more, and have access should have done more
to better options in retirement? The François Barker
The content of this report draws on
Government and society as a whole Head of Pensions
two round-table client discussions, a
will need to tackle this problem if we
series of in-depth interviews, and a T: +44 20 7919 0675
are to avoid having whole generations
material research exercise, all francoisbarker@
who simply cannot afford to retire.
conducted with Winmark during the eversheds-sutherland.com
The lack of adequate DC savings is second half of 2019.
likely to be a particular issue with the
3A view from the front line
The Future of Pensions
Innovation
checklist
We set out below the full set of ideas produced in the
course of our research project. We have listed these in
order of popularity, based on a quantitative survey of the
ideas which we conducted with Winmark in late 2019.
Make all annual pensions
1 statements show a consistent
and realistic annual income at
retirement
9
Establish new investment vehicles
targeted at the life stage and
aspirations of specific demographics
Develop artificial intelligence (AI)
10 driven online financial advice
2 Accelerate development of
the pension dashboard
tools that can make personalised
recommendations
Give employers increased
Introduce a savings and 11 responsibilities to provide financial
3
education and advice for their staff
pension planning "rite of
passage" for young people Rebrand Environmental, Social and
12 Governance (ESG) as "responsible
investment"
4 Extend AE to the self-employed
13
Introduce consolidation legislation
to permit alternative routes to
settlement
Introduce safe harbour legislation
to allow trustees and employers Give management incentives for
14
5 to recommend and pay for
independent financial advisers
higher worker engagement with AE
Enable collective defined
(IFAs) to advise their members
15 contribution (CDC) as a tool to
collectivise life expectancy risk in
Establish a central independent
6
the decumulation stage
pensions commission to direct
pension strategy 16
Require job adverts to prioritise
information about pension benefits
and financial education at work
Encourage DC investment strategies
7 with increased appetite for
diversification and risk
17 Remove AE opt-out
Consolidate DB funds into a
18
8
Develop interactive apps that Pension Protection Fund (PPF)
introduce gamification to nudge sovereign fund
engagement with lifetime savings
The Appendix contains details of the statistical analysis from our survey.
4A view from the front line
The Future of Pensions
Executive
summary
It is impossible to cover in a single paper everything which
came out of our research exercise during 2019. We have
therefore focused in this report on four of the major themes
which consistently came up. We have summarised the
discussion on each theme, provided some domestic and
international commentary on each, and highlighted some of
the innovative solutions raised during the discussion.
Theme One Theme Three
The future of DB – The future of long-term
facilitating a “safe landing” pensions planning and collaboration
DB is not the Future of Pensions for many outside Pensions are long-term issues which span many
the public sector but it will be critical to achieving parliaments, governments, election cycles and
what we call a safe landing - to bring legacy DB Chancellors. So pensions, tax policy and legislation
arrangements to a close over the coming decades should not be left in the hands of politicians
as the Future of Pensions switches increasingly to whose livelihoods inevitably require a focus on
DC. This will be via a combination of buy-out for short-term gains. We need a longer-term planning
those plans which can afford it, self-sufficiency or approach – perhaps in the hands of a permanent
consolidation for others, and more radical solutions pensions commission which can also ensure that
for the minority of corporates which will never be the collaboration process is a fully diverse effort,
able to afford their DB plan. The safe landing needs to reflecting the full make-up of society.
allow corporates a safe exit, and ensure trustees and
members have security for accrued promises.
Theme Two Theme Four
The future of DC – better coverage,
The future of pensions
adequacy, consolidation and decumulation
engagement and communication
Although AE has improved coverage, current
Historic levels of pension plan membership through
contribution levels are unlikely to deliver adequate
AE seem to be coupled with overwhelming lethargy
retirement incomes for many. This is likely to be a
at the expense of awareness and engagement in
particular issue for the “forgotten cohort” aged 35 –
pension saving. Achieving realistic pension incomes
45, and the self-employed. This presents risks for both
in retirement will depend on engaging people to
Government and corporates – in terms of further
save more. The dashboard has a role to play here but
calls on the state, and interference with companies’
realistically still feels a long way off. In the meantime,
succession planning. Better governance, economies
the simpler annual benefit statement is one of several
of scale and the ability to develop innovative
ideas which could make a real difference.
solutions to decumulation are likely to drive further
consolidation: the future Remove lies with a smallConsolidate DB
probably Auto-
number of large-scale Enrolment master trusts.funds into a pension
authorised opt-outa
Protection Fund (PPF)
sovereign fund
5A view from the front line
The Future of Pensions
Theme One: The future of DB
– facilitating a “safe landing”
Statutory benefit But pension plan funding is not a "one – accelerating the development of
size fits all" situation. For some plans alternatives to buy-out such as the
enhancements, the and sponsors, the long-term funding new DB superfunds or
section 75 debt “lock-in”, objective might legitimately not be consolidation vehicles. There is
buy-out. And some employers might currently no specific regulatory
longer life expectancy and never be able to break free of the framework which applies to them
increased regulation have regulatory burden of their DB plans – but it seems likely that one will be
all played a part in the an issue which we considered in some introduced along the lines of the
detail several years ago.1 master trust framework. Many DB
demise of DB plans. plans will be interested in how this
The DB regulatory regime needs to market develops. Trustees will want
Many of the DB generation will get be flexible enough to recognise and to know if it offers a safe alternative
better benefits than the sponsor ever support this where appropriate. This to buy-out. Sponsors will be
imagined because of the impact is not to suggest that there should interested in whether it allows
of statutory enhancements and be a wholesale weakening of DB them to move the DB plan off the
equalisation requirements. At the same accrued benefits to help corporate corporate balance sheet at a lower
time, legislation prevents benefits sponsors. Accrued benefits represent cost than buy-out – and with
which have been accrued to date from the retirement security of members certainty of no come-back later on
being reduced – which can prevent who have worked and contributed
efforts by sponsors to manage their towards them. In reality, with most
DB liabilities. Sponsors must ensure DB plans closed to new members and
these benefits are delivered – whatever future accrual, DB will be a diminishing
it costs - unless insolvency prevents “All plans should go in
part of the Future of Pensions for many
them from doing so. outside the public sector.2 But it will be the PPF now and create a
important for all involved to achieve sovereign wealth fund.“
Meanwhile, DB regulation is entering
a “safe landing”, bringing legacy DB
yet another period of significant Peter Askins
arrangements to a close over the
change. TPR is increasingly delivering Director/Trustee,
coming decades as the future switches
on its “clearer, quicker, tougher” Independent Trustee Services Ltd
increasingly to DC.
mantra, and new legislation is likely
to formalise the need for DB plans In this context, would it make sense to “The historic options of
to have a formal long-term funding offer plans and corporates alternative full insurance outcomes
objective. For many plans, that will routes to an acceptable DB end-game?
mean arriving at a point where benefits
at one end and PPF at
This approach could include ideas like:
can be bought out. Preparing a plan the other drive binary
for buy-out requires trustees not only – facilitating DB members to reach outcomes, there needs
to adopt a suitable investment and properly informed and supported to be real creativity and
funding strategy but to address any decisions about their DB
historic problems with benefits and retirement options. This may acceptance that in some
data. This will include dealing with require DB trustees and sponsors cases promises made
any GMP inequality – presumably to engage more fully than they do many decades ago are no
ultimately via conversion – and now in making quality financial
longer affordable. There
ensuring that the benefits currently advice and guidance available for
being provided are the ones that the their members and workers should be the flexibility to
plan documentation says should be pursue other outcomes
paid. with and for members.“
Chris Martin
Executive Chairman,
Independent Trustee Services Ltd
1 See “The Greatest Good for the Greatest Number” (December 2015), published by Cass
Business School and the Pensions Institute, and co-sponsored by Eversheds Sutherland.
2 See TPR, “The DB Landscape”, January 2020.
6A view from the front line
The Future of Pensions
Some of the innovations suggested by International lessons
our participants…
Peter Fahy
– enact safe harbour legislation to encourage trustees
Ireland
and employers to recommend (and pay for) properly
qualified IFAs to advise their members on their T: +35 3 16 64 42 06
retirement options - including transfers from DB to DC peterfahy@
where appropriate eversheds-sutherland.ie
– bring forward a regulatory framework for DB
consolidators as soon as possible to permit alternative Flexible DB
routes to DB settlement Any DB plan is a function of three variables –
– consolidate all DB funds into the PPF to create a contributions, investment performance and benefits.
sovereign wealth fund In the UK, accrued benefits, including pension increase
rights, are largely untouchable, barring an employer
insolvency. This puts significant strain on the other levers,
“Legacy DB is not linked to current staff and as a consequence on the UK pension protection
motivation or strategy so inevitably system.
sponsors are less engaged, which is why In Ireland, benefits under DB plans can be reduced
pursuant to a statutory process when other options have
buy-in/buy-out is attractive.“ been exhausted. This can only be done in a controlled and
Senior Professional Trustee limited fashion which is sanctioned by the Irish pensions
regulator. This is an important safety valve which has
enabled a number of Irish DB plans, and their sponsors,
to continue in operation after the financial crash. It has
primarily impacted on pension increases rather than core
benefits.
It is a valuable de-risking mechanism which balances
the rights of DB members against those of sponsoring
employers, tax payers and other pension savers.
The Eversheds Sutherland view …
If we were starting with a blank sheet of paper, we We fully support the idea of trustees and sponsors
wouldn’t set up DB plans as they exist today. We would engaging with IFAs to help their members make informed
probably go for an Irish style lighter touch DB regulatory decisions. This isn’t about encouraging inappropriate DB
regime with fewer statutory constraints that ensures that to DC transfers. Rather, it is about robust governance
the plan can be adapted in changing circumstances. and good member outcomes - the freedom and choice
“DB lite” may well make a reappearance in the longer reforms offer real options to many. It is also about
term future – especially if the future of DC doesn’t yield managing the long-term reputational and liability risks to
adequate income to allow current workers (and voters) to trustees and sponsors of leaving members to access the
retire comfortably. IFA market unsupported.
But right now, we are where we are. DB plans might be For employers and trustees heading for a buy-out, they
legacy arrangements for many companies but they provide will need to expect some “bumps in the road”. A buy-out
core retirement benefits for many individuals and will only works if you insure the correct benefits. Almost every
continue to do so into the future. There may be sensible plan will discover discrepancies between what their plan
steps that would make life a little easier for corporate rules say and the administrative practice. Resolving these
sponsors, but these will need to be handled with care to differences may incur unforeseen costs such as correcting
ensure that members’ benefits are properly protected. and funding historic underpayments to members, or (in
extreme cases) rectifying the position in court.
Jeremy Goodwin Sarah Swift
Partner Partner
T: +44 20 7919 4564 T: +44 20 7919 0848
jeremygoodwin@ sarahswift@
eversheds-sutherland.com eversheds-sutherland.com
7A view from the front line
The Future of Pensions
Theme Two: The future of DC – better coverage,
adequacy, consolidation and decumulation
Figures from TPR show contribution required is 12% of total – investment: most members are in
salary,4 and that 13.6 million people are default investment funds. These
that 90% of those actively not meeting their target replacement should be improved to capture the
saving for retirement rate.5 To encourage higher saving, the illiquidity premium when members
PLSA has published retirement income are young and won’t need to
are doing so in a DC targets, building on work done in other access their funds for many years.
plan.3 In the current jurisdictions, including Australia. This is perfectly possible in
climate, the Future of individual DC plans with properly
Part of the problem may stem from designed default funds, but
Pensions clearly lies in current AE contribution levels which investment in illiquids in the DC
are 8% of a band of gross earnings
DC. It is administratively (with 3% paid by employers). Clearly
space could increase if CDC plans
became a reality. Here, members
simpler and the costs this falls some way below the
do not have individual accounts
PLSA’s suggested minimum, but
to the employer are members may be assuming (not
and the trustees invest the whole
of the fund – meaning they can
relatively fixed. unreasonably) that the Government
make more use of long-term
has set contributions at an adequate
AE – which is overwhelmingly DC in investments
level. Given that AE is, by definition,
nature – has been a great success. something which is “done to” – charges: cost is not the same as
However, there are gaps. In terms people, the Future of Pensions could value, but it is a matter of logic that
of coverage, AE does not currently potentially include DC members charges taken from a DC account
cover the self-employed, and anyone arguing that they were misled and will inevitably impact the final
automatically enrolled has the right that employers and trustees have not amount which is available to
to opt out at any time. In terms of done enough to provide an adequate support retirement. Transparency
adequacy, the amount of money retirement income. around DC costs and charges is
currently being saved by members
already improving, and one future
and their employers is likely to be Problems with DC adequacy are likely development is likely to be a much
too low to provide a decent income to be particularly acute amongst the
clearer requirement to tell
in retirement. cohort aged 35-45: these individuals
members about the individual
will generally be too young to benefit
There are several reasons for the pounds and pence costs they are
from DB pensions, and yet have
adequacy gap but one of the key paying
insufficient time to build up meaningful
ones is that members are not given DC accounts. – governance: bigger is often better
the tools to understand the level of in terms of economies of scale and
pension savings they need to make or All that said, the level of contributions quality control, and the future
what their DC account will provide in is only one factor that feeds into probably lies with a small number
practice. New initiatives to improve income levels in retirement. There of large scale authorised master
member engagement are described as are others: trusts. These will be best placed to
part of Theme Three. develop innovative solutions to
– retirement age: state pension age
However, even if members have more decumulation which may combine
is already set to rise to age 68 and
information, there is no guarantee that drawdown, cash and annuities -
may well rise to age 70 and beyond
they will be able to save enough for as well as ongoing support for
in the future. This will also have
their retirement given that real incomes individuals throughout retirement
implications for employers and
are under pressure. The Pensions - rather than simply defaulting to
how they accommodate ageing
and Lifetime Savings Association an annuity purchase or staying
workforces, particularly in manual
(PLSA) estimates the minimum annual completely in cash.
occupations
.3 TPR Blog “DC growth indicates automatic enrolment is starting to mature”, 31 January 2019.
4 “Hitting the Target”, July 2018.
5 “Retirement Income Adequacy”, November 2016.
8A view from the front line
The Future of Pensions
Some of the innovations “I am very concerned that charge
suggested by our participants... caps limit more innovative
– encourage DC investment strategies with investment strategies.“
increased appetite for diversification and risk
Senior Professional Trustee
– remove the ability of automatically enrolled
members to opt out
“Size does matter. The economies of
– extend AE to the self-employed
scale of larger master trusts enable
– establish and publicise new investment vehicles
specifically targeted at the life stage and better governance and increased
aspirations of key cohorts resource for innovation“
– use CDC as a tool to collectivise life expectancy/ Neville Howe
pool mortality risk in the DC decumulation phase General Counsel and Corporate Secretary, NEST
“Pensions saving is just one of a number of competing
priorities. It often doesn’t get on the priority list, debt
management comes first.”
Harry Baines, Chair of Lloyds Banking Group Pension Trustees Limited
“Overall savings levels are nowhere near adequate. The whole
approach to work and retirement is going to change. People
are going to work differently and longer. We need to think
about savings holistically, thinking about all sources and
types of assets together and bringing long-term care into
the equation.”
Chris Martin, Executive Chairman, Independent Trustee Services Ltd
“Don’t let people opt out! Employees need to be saving at least
8% to 10% of their salary over an entire lifetime to have any
prospect of a pension worth 60% of final salary.”
FTSE 100 Group Pensions Director
9A view from the front line
The Future of Pensions
The Eversheds Sutherland view
DC is clearly the Future of Pensions. But it only Going forward, we believe that the DC space will
works successfully if it generates sufficient savings consolidate at pace and continue to coalesce around
to allow individuals to retire with dignity when authorised master trusts, providing greater economies
they leave the workforce. There are gaps in the of scale, better governance and effective decumulation
current system which create risks for employers, options. Greater innovation in the market and
trustees and society as a whole. Current DC regulatory support for trustees in terms of guiding
retirees are likely to be propped up by some form and supporting their members will be key to this. The
of DB pension, but those retiring in the future - primary challenge for the future success of DC plans –
with only DC benefits - may well find that their already being addressed by some of the master trusts
fund is insufficient to support the retirement – is how to convert a fund into something which looks
they anticipated. like a retirement income and isn't an annuity.
Companies will find it much harder to succession
plan if their older workers cannot afford to retire, Stuart Earle
and they may be subject to legal or moral claims Partner
for support. The trustees of plans which provide
sub-optimal outcomes for members may also T: +44 29 2047 7607
find themselves challenged on whether they have stuartearle@eversheds-sutherland.com
properly discharged their fiduciary duties. Securing
decent member outcomes, and protecting against
these risks, means that corporate sponsors and
Jon Walters
trustees need to be thinking beyond the minimum
Partner
in terms of DC provision.
T: +44 161 831 8525
jonwalters@eversheds-sutherland.com
”Younger members saving for their retirement have long time horizons so there’s a
real opportunity to consider competitively priced and carefully selected illiquid as
well as liquid assets as part of a diversified portfolio.”
Ruston Smith, Chair, Tesco PLC Pension Scheme
”A contraction of the number of schemes will clearly help individual schemes - but it
is not a panacea that will address all of the fundamental issues.”
Anthony Soothill, Chair, Telefonica UK Pension Plan Trustee
"There is a real challenge between debt, pensions and housing for young people. We tell
young people that the earlier they start saving the better and then we make it hard for
them to start. We need to have tax incentives for earlier engagement. Employers need
to think about whether this generation of DC savers will be able to retire: they may be
being short-sighted because they will be faced with the costs of an ageing workforce
not able to fulfill their core employment function.”
“AE has great coverage, but input is entirely inadequate. There needs to be auto-
escalation to mandate and embed the culture to save enough.”
Chris Martin, Executive Chairman, Independent Trustee Services Ltd
10A view from the front line
The Future of Pensions
International lessons
Adam Cohen Mark Latimour Eric Bergamin
United States Australia Netherlands
T: +1 202 383 0167 T: +44 20 7919 0779 T: +31 1 02 48 80 50
adamcohen@ marklatimour@ ericbergamin
eversheds-sutherland.com eversheds-sutherland.com @eversheds-sutherland.nl
Innovation in DC DC illiquid assets and scale CDC - a success story
In the United States, some of the Compulsory superannuation has In the Netherlands, CDC was
innovation in DC plans has been existed in Australia since 1992 and introduced in the early 2000s,
driven by “non-discrimination” contributions are high compared to offering members targeted pensions
rules that limit the contributions the UK AE system – currently 9.5%, at retirement based on salary, but
permitted by highly compensated increasing to 12% by 2025. This with only DC funding obligations
employees based on how much the produces real scale with over AUD on employers. The challenges with
non-highly compensated employees $2.7 trillion of assets across some member communication, and the
are contributing. This has led to 200 super funds. In December 2019, need to suspend indexation in
significant employer interest in the prudential regulator released the extreme circumstances, have been
voluntarily adopting arrangements first of its "heat maps", identifying well-reported. But the view in the
like AE and automatic escalation, in underperforming products within Netherlands is that these issues
which participant contribution levels super funds. The message is not with CDC are outweighed by the
are automatically increased each year subtle: "improve, or go". advantages: Dutch CDC plans offer
unless they opt out. improved risk sharing between
The drive has meant that funds employers and employees, have
Looking ahead, legislation enacted (leveraging the experience of their achieved better investment returns
at the end of 2019 made it easier own investment management teams) than individual DC and – since they
for DC plans to offer distributions in invest globally, and often directly, in pay a pension – solve the issue of
the form of a commercial annuity huge infrastructure projects - such as decumulation. Social partners often
purchased with the account balance. shopping precincts and wind farms choose CDC as an intermediate plan
The legislation also paved the way - carefully matching the investment between DB and individual DC, offering
for employers, particularly small to the fund's liquidity requirements. best of both worlds.
employers, to band together with The benefit to members and the
other unrelated employers to adopt economy at large is evident. The
plans that are jointly administered illiquidity premium means that returns
and invested, gaining economies of typically outstrip those seen in the UK.
scale previously stymied by technical Meanwhile, the injection of capital and
rules. These developments may have a liquidity into the economy has driven
meaningful impact on DC plans in the growth year on year, and is generally
coming years. regarded as a key reason that Australia
weathered the storm during the
financial crisis.
“We are trying to solve a problem for too many different groups of people
with one solution. We need to look at solutions in a personalised way. More
creative solutions are required with HMRC, employers and professionals
all involved. Every problem in pensions requires collaboration. We should
look at multiple pots, e.g. employer pensions in one pot, another with taxed
relief for savings for specific expenditure and so on.”
Alison Hatcher, Global Head of Pensions, HSBC
11A view from the front line
The Future of Pensions
Theme Three: The future of long-term
pensions planning and collaboration
Governments, employers, – the indexation and revaluation of Both the state and employers have
DB pensions: this changed the important roles to play in supporting
individuals, plan bargain struck between employers long-term planning and collaboration
trustees, financiers, and members and improved around pensions. The primary role
benefits so they became of the state should be to provide
regulators and advisors unaffordable for some employers a safety net for those who will not
all have an important and commercially undesirable for have adequate pension provision
others. This reinforced some of the of their own. Redistributive policies
role in addressing the may be required at some point, such
issues around Theme One
pension savings gap. considered earlier in this report as limiting higher rate tax relief to
The constantly evolving increase the state pension (perhaps
– the freedom and choice reforms: to the £10,000 level identified by the
pension environment these created much greater Rowntree Foundation as an absolute
flexibility around DC benefits, but
poses complex challenges have led to a “dash for cash” which
minimum basic level) or implementing
a single rate of tax relief to benefit
that will only be addressed is often far from optimal low earners.
if all stakeholders – the annual and lifetime allowance
Employers – who provide and
make a commitment to changes: these were designed to
contribute to pension arrangements
prevent tax abuse, but are
clarify responsibilities, impacting adversely on longer
– are generally trusted by employees,
and occupy an excellent position to
collaborate effectively working lives and phased engage and communicate with their
retirement plans. They are already
and recognise that radical interfering with DC retirement
staff. This means they are likely to play
a crucial role in helping to educate
solutions may be required. planning and the operation of on pensions, and to facilitate financial
the NHS advice – including helping with debt
Pensions are a long-term issue which
spans many parliaments, governments, The collaborative approach required to management and helping employees
election cycles and Chancellors. take on the complex issue of meeting move from payday lenders to "Salary
Businesses develop strategies around the pension savings gap may therefore Finance" plans.
retirement over many years based on need to be conducted outside the
assumptions that the legal, regulatory short-term, politically constrained
and tax framework will remain relatively interests of the Government. There
stable. But politicians are – almost by is a role for a long-term, central
definition – focused on the relatively independent commission. This would
short-term (their livelihoods depend ensure that the pensions and tax
on it, after all). History is littered with framework remains stable and is not
examples of where pensions law has adjusted to meet short-term economic
been changed to address short-term or political needs, and that the needs
issues, without realising the longer of all parts of society are addressed.
term consequences, for example:
12A view from the front line
The Future of Pensions
”61% of tax relief goes to 9% of the population. We
could abolish tax relief and double state pension or
have a single rate of tax relief to benefit low earners.”
“The state will have to take greater responsibility for
pension provision for those on low earnings, who will
never have sufficient savings to provide a meaningful
outcome. We need an independent commission
that is not in thrall to the pensions industry or the
government of the day.”
Peter Askins, Director/Trustee, Independent Trustee Services Ltd
The Eversheds Sutherland view
There is no "one-size fits all" solution that can address ensure that the end result is not driven by their own needs
the fact that different people have different needs but by the needs of an increasingly diverse society. Society
both in relation to how to save for their retirement no longer has the same shape and values that it did in the
and what they need when they retire. Pensions policy era of DB plans, and the Future of Pensions should reflect
needs to take into account both an individual’s ability those changes.
to save for retirement and their attitude to saving and
retirement. Career history, level of pay, variety of jobs
and employers, whether they work full or part-time and Anthea Whitton
whether they have periods outside paid employment Partner
have a very obvious and direct connection to an
T: +44 113 200 4663
individual’s ability to save for retirement. But, class,
antheawhitton@eversheds-sutherland.com
cultural background, ethnicity, sexuality, religion and
gender also impact on attitudes and behaviours when it
comes to pension saving.
Ele Lovering
People are also increasingly transitioning from work
Partner
to retirement in a much more fluid way than before.
Any collaborative solutions – including a permanent T: +44 161 831 8120
pensions commission - should encompass all types of elenorlovering@eversheds-sutherland.com
pension savers. A challenge for those in the pensions
industry who make and influence pensions policy is to
13A view from the front line
The Future of Pensions
Some of the innovations suggested by our participants...
– establish a permanent pensions commission to take “pensions out of
politics”, and direct long-term pensions strategy
– give employers increased responsibilities to provide financial education for
their staff - they occupy a trusted position
“Voluntary saving is an option at some levels
of income, but … at the lowest levels the
only way to materially improve retirement
income is better state provision.”
Danny Wilding, Partner, Barnett Waddingham
“Some people are retiring earlier as a result of
allowance changes and that is not necessarily a
good thing. Is it a tax on good investments? The
annual limit just turns people off. It also means
HNW [high net worth] individuals have less skin
in the game, meaning they are less likely to step
forward as trustees and it may alienate the key
management in sponsor companies.“
Anthony Soothill, Chair, Telefonica UK Pension Plan Trustee
14A view from the front line
The Future of Pensions
International lessons
Vincent Roulet Jennifer van Dale Lorcan Keenan
France Asia Ireland
T: +33 1 55 73 42 23 T: +852 2186 4945 T: +35 3 16 64 42 19
vincentroulet@ jennifervandale@ lorcankeenan@
eversheds-sutherland.com eversheds-sutherland.com eversheds-sutherland.ie
The case for gradual reform Significant challenges in forward Plan ahead for state pension
The launch of President Macron’s pension planning age changes
pension reforms in France - and the In Asia, the pensions landscape is With the Irish state pension age due to
ensuing social protests – show how varied and does not naturally lend increase from 66 to 67 in 2021 (and to
important it is to reform pension itself to a one-size fits all solution, or 68 in 2028), the interaction between
systems petit à petit – incrementally - even forward planning outside the the state pension age and mandatory
to ensure they stay fit for purpose. The state system. This is supported by retirement ages became an unlikely
current system, managed on a pay-as- some of the demographic data. In campaign issue during the recent Irish
you-go basis and split into 40 different India and Indonesia less than 10% of general election. Parties lined up with
plans for different professions, dates the population is over 65. In Japan, competing proposals to offset the
back to the Second World War. The that figure is more than 45%. The impact for workers. There was little
plan has fulfilled its aim but the state-mandated pension system in focus on the role which workplace
price is very significant differences Japan covers more than 90% of the or private pension provision might
in treatment between professions, labour force, whilst in China that play in plugging this gap. Even the
constantly rising contributions and figure is barely above 50% (and in introduction of AE, currently planned
structural inequality depending on a Malaysia, the Philippines, Thailand and for 2022, barely got a mention.
worker’s life expectancy. Vietnam it is well under 50%).
The legislation increasing the state
The aim of the reforms is clear: to Current pension systems range from pension age was introduced as far
unify all state and public pension basic government assistance to DC back as 2011. However, virtually
plans, to set up a simpler, universal and (less frequently) DB plans. In nothing was done at the time,
points-based system; to focus the Hong Kong the system is financially or since, to deal with the impact
state’s role on the lowest paid (there sustainable but pays an inadequate this would have for workers.
will be no pension guarantees for benefit. In South Korea, the system Unsurprisingly, workforce/private
remuneration above €120,000), and is neither sustainable nor adequate. pension coverage rates did not
to give private DC pension plans a Singapore’s Central Provident Fund improve significantly and, for many,
greater role. is considered both sustainable and retirement provision still starts and
adequate but it is not open to non- ends with the state pension. Given
The French are largely unaccustomed citizens and permanent residents this, the increase to state pension age,
to private sector pension plans and so in the way Hong Kong’s Mandatory particularly for those with mandatory
a large proportion of the population Provident Fund is. retirement ages, was a ticking
rejects them as a matter of principle. time bomb.
In-depth information and training is The main problem in India and other
crucial – for example on investment Asian countries with large rural This provides something of a “lesson”
(especially responsible investment), populations is coverage. Expanding in the wrong way to go about
the various exit options, and the pensions on a non-contributory significant pension reform. Adjusting
long-term solvency of the managing basis to the poorest workers is a state pension benefits (Pillar I) without
bodies. These are the topics that the pressing need. Parts of Asia have seen taking any measures to encourage
management bodies should address significant financial growth in the past or enforce greater workplace/private
and on which they will need to train, three decades and an accompanying pension coverage (Pillars II and III),
convince and reassure the French rise of a stable middle class. There are won’t work. A holistic approach, which
people. In France as elsewhere, opportunities to expand retirement takes into action the role of the three
communication is a key factor in the savings by creating or building on Pillars is required.
development of successful private existing second and third pillar
pension systems. systems, but governments are likely
to focus on first pillar resources
until poverty, rural coverage, and
demographic problems have
stabilised.
15A view from the front line
The Future of Pensions
Theme Four: The future of pensions
engagement and communication
In many ways, pensions In this context, it will be key to The simpler statement could be
make pensions communications as combined with other initiatives to
coverage is much less accessible as possible - clear, simple, drive member engagement further:
problematic than it relevant and helpful - and to use a “statement season” with all benefit
technology to engage at least with the statements delivered around the
was because of AE. In younger generation. Other countries same time each year, or paper
the five years between can point to examples of both which statements delivered in specially
have worked well. coloured envelopes to highlight
2012 and 2017, the their importance. The FCA is also
proportion of eligible One of the mechanisms that the recommending the use of “investment
Government intends to use to tackle pathways” for contract-based
employees participating engagement is the introduction of members at retirement to avoid a blind
in a workplace pension pension dashboards where members move into drawdown.
can view information about all of their
rose from 55% to 84% - pension savings in one place. The idea Broader initiatives to help drive
an increase of around 10 is that members who don’t like what engagement in pensions could
million workers.6 the dashboards are telling them about also include:
their readiness for retirement will
But this has come at the cost of take action. – using climate change to engage
engagement as individuals need not younger DC savers in particular.
take active decisions in an AE regime: Plans will be under a statutory “Rebranding” ESG as responsible
84% of people don’t know how much obligation to provide information to investment could encourage
they need to maintain their standard the dashboards. Although it is not yet increased pension saving on the
of living in retirement,7 and 16% have clear exactly what this will look like, basis that contributions will be
not thought about how they will the need to have data ready will be responsibly invested in ways which
manage at all.8 Historic levels of plan a challenge for some plans. And in acknowledge the financial risks
membership seem to be coupled with reality, we are still many years away associated with environmental
a degree of lethargy and a lack of from the full implementation of an concerns
awareness and engagement. effective pensions dashboard.
– requiring employers to highlight
So what action can be taken now to the entire benefits package –
To have a realistic chance of achieving
pensions near the levels of the DB help employers and trustees engage including pension – rather than
generation, many DC savers and their with their current and prospective just the headline salary when
employers will need to make material members and educate them over advertising vacancies. This could
additional contributions, and to decide the value of their retirement savings? help to foster a culture which
how to use the proceeds. This means One option may be the Simpler promotes the importance and
trying to engage savers to make Annual Benefit Statement, which the financial value of pension saving
proactive and sensible choices about Government is promoting, based on
a template created by the Eversheds – bringing more clarity to when
what to do with their money. This is trustees and employers can
a huge challenge in a society where Sutherland team and others.9 The
idea is to make annual DC statements communicate with members and
real earnings are under pressure, levels employees on pension saving
of financial literacy are relatively low simpler, clearer, shorter and – above
all – more consistent, to engage without fear of falling foul of
and where there is broad agreement providing financial advice
that the retirement savings landscape members in their retirement savings
is complex and difficult for many to and allow them to compare their plans. – building a financial “rite of passage”
understand. around the receipt of a National
Insurance (NI) number at age 16
– for example, including
communications about savings
and pension planning. This could
help to kick start financial
6 DWP, “Workplace Pension Participation and Savings Trends of Official Statistics: 2007 to 2017”, 5 June 2018.
7 PLSA, “Hitting the Target” consultation, October 2017. education as young people enter
8 FCA, Key findings from financial lives survey, June 2018. into adulthood
9 DWP, “Simpler annual benefit statements for workplace pensions”, 1 November 2019.
16A view from the front line
The Future of Pensions
Some of the innovations suggested by our participants...
– accelerate development of the pensions dashboard – require job adverts to prioritise information about
pension benefits and financial education at work
– develop AI driven online financial advice tools that can
make personalised recommendations – rebrand ESG as "responsible investment"
– introduce a savings and pension planning “rite of
“We have grown engagement from 10% to 70%
passage” for young people around the receipt of their
NI number at age 16
in 10 years using tools like Chatbox messaging.
Also tools that show relevant and interesting
– develop interactive apps that introduce gamification to interactive information such as what a £2.50 cup of
nudge engagement with lifetime savings coffee will compound to over time, or provide an
– make all annual pension statements show a consistent annual statement that indicates annual income at
and realistic annual income at retirement retirement will boost engagement.”
– give management incentives for higher worker
Rose Kerlin, Group Executive, Membership, AustralianSuper
engagement with AE
The Eversheds Sutherland view …
AE has been a great success in terms of coverage, even if a viable option for those unable or unwilling to engage. If
there is much more to do for some cohorts – for example, people won’t “do” pensions for themselves, then pensions
very young workers, or the self-employed. The principal will have to be “done to” them to a greater extent than at
challenge now is how to get those who are already present.
enrolled to engage with their savings and contribute
There is also a need to educate and increase the level
more. Engagement is very difficult to measure – but we
of financial literacy generally within our society – both
could probably use the proportion of those not invested in
amongst the working population and for those still in
default funds as a rough proxy.
education. Given that “knowledge is power”, an increased
This feels right as the starting point: more engaged savers understanding of how DC pensions work is likely to make
who realise the importance of contributing higher amounts them more accessible and less daunting as a topic. In turn
is likely to be better for the individuals themselves, for their this will support improved engagement and decision-
employers and trustees, and for society as a whole. making by DC members.
A message about the good that pension plan assets can
do could also help member engagement. The emphasis Francois Barker
on environmental, social and governance factors when Head of Pensions
investing plan assets has come at exactly the same time
that the world is waking up to the potentially material T: +44 20 7919 0675
effects of climate change. Put simply, the link between francoisbarker@
assets that come with good governance and/or a limited eversheds-sutherland.com
carbon impact, and long-term financial security for the
plan, is a great message for members.
Emma King
Ultimately, however, if increased and better communication Partner
does not improve engagement, then the fall-back might
have to be additional automation and default structures: T: +44 121 232 1829
increased AE contributions and default retirement emmaking@
pathways which use drawdown and tax free cash early on eversheds-sutherland.com
in retirement and an annuity later on. Members could still
be given information and choice but there would then be
17A view from the front line
The Future of Pensions
International lessons
Eric Bergamin Mark Latimour Adam Cohen
Netherlands Australia United States
T: +31 1 02 48 80 50 T: +44 20 7919 0779 T: +1 202 383 0167
ericbergamin@ marklatimour@ adamcohen@
eversheds-sutherland.nl eversheds-sutherland.com eversheds-sutherland.com
Pension 1-2-3 - the Dutch Simpler Financial advice for DC members Having a benefits “season“ to
Annual Statement The range and complexity of increase engagement
In the Netherlands, the "pension 1-2-3 accumulation and decumulation It is common in the United States for
tool" has been live since 1 July 2016 options in Australian superannuation employers to have an annual “season”,
as a way of getting members engaged plans can be overwhelming. Enabling usually lasting about a month in the
with their pension plans. This (digital) members to access good financial fall, during which employees have the
tool provides layered information to advice is seen as crucial and is a key opportunity to select their employer-
the member. The member can choose tool in boosting member engagement sponsored health plan options and
to access the level of information they (and ultimately, better financial other employee benefit plan choices.
want from each pension plan via the outcomes in retirement). This period usually includes education
plan’s website: about the employer’s retirement plan,
The recent Royal Commission into
and it provides an opportunity for
– Level 1: high level information ("the financial services highlighted the
employees to pause and reflect on
pension plan in 5 minutes") - all the dangers of conflicts where a financial
their level of savings and choices. This
important elements of the pension adviser and the trustee form part
has proven to be an effective way to
plan in straightforward language of the same corporate group. The
get employees’ attention in a way that
result has been class actions against
– Level 2: high level information with periodic communications sprinkled
the wealth management industry
some additional explanation ("the throughout the year might not.
over the quality of the advice and
pension plan in 30 minutes"), still in the unauthorised deduction of Many employers have also attempted
straightforward language but with commissions from member accounts to increase engagement by
some technical information (including after the member’s death). implementing “financial wellness”
added in The message is that financial advice programs. These programs are usually
– Level 3: all the detailed information is a valued and important part of provided by third party vendors
(including relevant legal the member journey, but needs to who offer employees the ability to
documents e.g. pension be structured carefully to ensure its speak with a financial advisor to
regulations, annual statement and independence and integrity. receive information about a variety
all the information mentioned in of personal finance topics, including
levels 1 and 2) retirement savings as well as financing
college, repaying debt, budgeting,
and more. The vendors also usually
have websites with additional detailed
information and interactive tools.
“We can only expect members to take greater “There are some great apps available that are really
personal accountability for their retirement savings engaging youngsters. Apps get over the barrier of
if we give them clear, simple and consistent easy accessibility and availability and enable real-
information to help them make the right choices." time, highly personalised interaction.”
Ruston Smith, Chair, Tesco PLC Pension Scheme Anthony Soothill, Chair, Telefonica UK Pension Plan Trustee
18A view from the front line
The Future of Pensions
Conclusions
The pensions landscape continues to be in a state of flux
– as it has been for the last 25 years. What is clear is that,
as part of this process of transaction, new models need
to emerge to ensure that pension provision for the future
is adequate and fit for purpose – for all generations of
savers, and all groups in a diverse society.
The innovation ideas we highlight in The alternative is that we run the If the industry embraces change and
this report are there to be used by risk of sleepwalking as a society into innovation in this way, the future of
policy makers – and we hope that a future where people are required pensions promises to be a long and
they will be embraced fully. They to work long beyond the age when exciting one.
offer the chance to: they can productively do so - simply
because they cannot afford to retire.
– bring DB plans to a safe landing
Government, regulators, sponsors,
– reshape DC arrangements (both
providers and trustees should all
individual or collective) so that
consider new benefit models,
they are better placed to provide mitigate developing risks and
adequate incomes in retirement embrace new technologies as
– enhance the future of long-term part of considering what current
pensions planning and and prospective savers need for
collaboration so it is less subject the future.
to short-term political whims
– develop ways to communicate
and engage more fully on
pensions issues, to increase the
chances of a decent retirement
for all
19A view from the front line
The Future of Pensions
Observations
from Winmark
John Madden,
Research Director at Winmark
The challenges society faces in
providing adequate retirement
We looked through all the short-
term “noise” – for example on Winmark has
income for its citizens are wide-
ranging and complex, and finding
Brexit, elections and politics. This is
because pensions are, by definition, been pleased to
a path through the maze of
demographic, political, social and
much longer-term than this. We
also encouraged our participants to support Eversheds
financial factors influencing the future
direction of the pensions landscape
share some more unorthodox ideas
to help encourage new, innovative Sutherland’s
can be daunting. perspectives and to generate
discussion. We hope the report will Future of Pensions
Winmark has been pleased to support
Eversheds Sutherland’s Future of
stimulate debate and reflection
about the roles and responsibilities initiative as a start
Pensions initiative as a start to tackling
the issues. The initiative involved a
of all stakeholders in the pensions
arena, and help contribute to future to tackling the
series of in-depth interviews and
round-table discussions with senior
pension provision in the UK that is
better equipped to meet the many issues.
experts (including plan and fund challenges ahead.
managers, pension chairs, consultants
and analysts). These helped to define We would like to thank all of the
the challenges, and explore how senior professionals from corporate
they can be addressed, so that future plans, investment funds, trustee
generations can enjoy financial boards and advisory firms who
security in their retirement. generously gave their time to help
in the production of this report.
Their perspective shared in personal
interviews and at our round-table
sessions is greatly appreciated.
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