From a regulatory perspective, there will be much to ensure that legal and compliance teams are kept even busier than usual. The Department for Work and Pensions (DWP) has already signalled its intention to publish new value for money metrics, which we expect to see early in the New Year.
This may change how Defined Contribution schemes and products are judged, initially by pension professionals but ultimately by consumers. Given that many consumers have limited knowledge of what constitutes good value from a pension provider, we have long said we would welcome these metrics. But the resulting information must be easily accessible to those it will benefit most.
Will this be the year to resolve the issue of small pots?
Every new year brings with it the hope of solving, to everybody’s satisfaction, the continual pensions administration headache of deferred small pots. While nobody can be sure of resolving this issue in 2023, there are likely to be more discussions about how and when deferred small pots should be consolidated.
We have consistently said a solution can only be reached if there is some Government intervention. The problem of millions of small, deferred pots won’t go away on its own and will continue to grow. The industry is working hard to find solutions to this complex issue.
The next 12 months will also tell us just how resilient automatic enrolment is. The anticipated increased financial pressures on millions of people could lead to a significant increase in the number of people who stop paying into their pension. These future findings, whatever they are, will be consequential for the industry.
How cost-of-living pressures may impact pension savings
In terms of conditions for saving, the Office for Budgetary Responsibility forecasts a fall in real household disposable income of 7% over the next two years. This will take household incomes back roughly to their 2013 level. As lower income households spend more of their money on essentials like food – where price increases have been particularly sharp – they will be the worst affected. The Government’s energy price cap on unit prices will only partially offset this.
Our own research shows that just 4% of UK pension savers surveyed would consider stopping their pension contributions in the next 12 months. A further 4% would think about reducing how much they save into their pensions over the next year. This is compared to 35% who said there’s a possibility they would reduce their holiday spending in the next 12 months.
While the cost-of-living crisis has not yet affected the running of auto-enrolment, it has likely seriously affected its future. There is no plan for the implementation of the 2017 review reform package: reducing the age threshold for automatic enrolment from 22 to 18 and removing the lower earnings threshold on contributions.
It’s hard to see how the Government can implement changes to auto-enrolment during an economic crisis of this sort. Government and the wider pensions industry can, though, use this time to prepare the ground for reform once the crisis has passed.
Further consultations on how to help savers access their DC pension pots
The much-anticipated response from the DWP on its consultation about decumulation in DC pensions should be a beneficial one. It has the potential to lay out a clearer pathway for supporting savers towards the best use of their pension pot. This is something of growing issue for automatic enrolment savers, with an increasing number now needing a plan for how to spend their savings.
We expect the conversation about schemes investing in less liquid assets to continue throughout 2023, especially after the Productive Finance Working Group published its guides to the issue in November.
The DWP has also indicated that it will consult on extending Collective Defined Contributions to multi-employer schemes. Taking all this into account, there will be little time for much else in the pensions policy world in 2023.