Isio’s response to the Autumn Statement

Read our response to the Autumn Statement from experts across Isio. 

Pooling plans are a distraction, use LGPS super surpluses to calm the perfect storm in local government

Steve Simkins, Partner and Public Services Lead said: 

“The Local Government Pension Scheme (LGPS) is currently holding up to £100bn more than it needs to fund its pensions promises. This is a huge extra buffer that has arisen unexpectedly since last year, and which was not planned for. Utilising this now is more important than making long-term plans to pool assets by 2040. Making some of this available through reduced employer contributions will make an enormous difference to local authorities and their communities. In the absence [in the Autumn Statement] of any additional funding for local government, typical large council could reasonably save at least £20m a year. This would be the an easy way to use pension scheme assets for productive financing, directly supporting the levelling up agenda.

The LGPS is being operated in a silo, detached from the local challenges faced by local authorities it designed to help. Those running local government should challenge themselves to be more holistic when considering funding challenges and risks, including pensions. Out with the Autumn Statement, the Chancellor still has the opportunity to hold Department for Levelling up Housing and Communities to account.

Pension schemes, including the LGPS are run on behalf of employers, and rely on the future of those employers. It follows that when pension schemes are in very good shape, but their employers are not, that a conversation should be had about how they can help. In this case, it seems clear that there is a much better use of LGPS super surpluses which should be directed towards essential services like children’s social care which are currently being pushed to the brink. It is imprudent for LGPS funds and their actuaries to be too prudent within their bubble – it could cause the whole local government bubble to burst.”

Mike Smedley, Partner said:

“The Chancellor has headed to the outback for his pensions solutions. The pot for life is going to revolutionise pensions in ways we haven’t yet imagined. It will change the dynamic between employers and employees and the consequences are uncertain. The big difference is we have thousands more schemes than Australia does and the UK’s pensions landscape is much more complex.

The pensions industry and employers aren’t ready for this yet.

We believe that the PPF as a public sector consolidator is unnecessary and could take years to come into operation. We already have a number of innovative consolidation approaches developed by the industry that already function well and are delivering the benefits of consolidation; improving the quality of governance, investment efficiency and member experience. We should be supporting these as an industry rather than waiting for a national scheme to emerge.”

Big changes for small pots – employees no longer just along for the ride

Will Aitken, Director, said: 

“We’re pleased that the problem of small pension pots is being addressed. However, today’s additional ‘pot for life’ proposals has the potential to revolutionise pensions as we know them.

An employee who chooses their own pension provider is, by definition, far more engaged in the pensions process than someone who’s along for the ride. But that change wouldn’t be without some pain as well. For employers, this potentially doubles a payroll’s workload and introduces many more opportunities for errors to creep into payments. If this change proved popular with employees, it would need to be accompanied by a rethink in how contributions are calculated, managed and monitored, one that might require regular oversight and assurance from third parties.

We also believe this would change the dynamic between employee and employer. To date, pension provision has been seen as something that ‘belongs’ to employers to some extent. This reform would change that dynamic and weaken that link, finally making it clear that in DC pensions, employees need to take ownership.

Finally, it will be fascinating to see how pension providers compete if they can go direct to consumers. Would they be trying to sell on the basis of past investment performance? Charges – cheap as chips or reassuringly expensive? User experience and employee peace of mind? How they choose to invest your money? A one-stop shop for all your finances?

Pots for life is a far more radical change than simply moving forward the existing plans to deal with small DC pension pots.”

Financial upside for DB schemes: Focus on value will see UK companies benefit from £100bn

Iain McLellan, Head of Research and Development, said:  

“Defined Benefit (DB) schemes in the UK find themselves in the strongest position they have been in for decades and significantly de-risked. We are pleased to see the Chancellor recognise this changing landscape, with more focus needed on squeezing value, rather than the last drops of risk, out of these schemes. The move to reduce the tax on authorised pension surplus payments from 35% to 25% demonstrates the Government’s support for DB sponsors to consider some financial upside from DB schemes. 

Our analysis indicates that, whilst maintaining the security of member benefits, there is the opportunity for DB pension schemes to provide over £100 billion of value over the next 10 years that could be used to support UK companies sponsoring these schemes and their current workforce as well as yield higher benefits for the members of these schemes where appropriate to share surplus.  We don’t see a wholesale shift in pension scheme investment strategy and member benefit security but in the right circumstances, the opportunity and upside to take a long-term view as well as a more orderly transition of pension schemes through the insurance exit door.”

“The question left unanswered today is whether there will be suitable incentives for DB schemes to invest in productive assets in the UK.”

A new consolidation vehicle is unnecessary – industry must get behind existing approaches to create savings

“The Chancellor announced a consultation will take place on using the PPF to launch a public sector DB scheme consolidation vehicle.  We believe this is unnecessary and could take years to come into operation.  We already have a number of innovative consolidation approaches developed by the industry that already function well and are delivering the benefits of consolidation; improving the quality of governance, investment efficiency and member experience.  We should be supporting these as an industry rather than waiting for a national scheme to emerge.

Based on our experience, we believe that if the remaining 90% of DB schemes that have less than 5,000 members were to consolidate they could generate £10bn in reduced expenses over the next 10 years.  These savings are before you even consider the wider range of attractive investment opportunities that larger pools of schemes can access, including the more complex UK productive assets that the Government is keen to see supported.”