Out-Law News 3 min. read
01 Dec 2015, 4:41 pm
The report estimates that assets under management held by defined contribution (DC) pension schemes will double between 2016 and 2020, from £280 billion to £550bn. However, around 90% of these assets will be held by a 'premier league' of between five and seven major providers, according to the authors or the report.
"Taken as a whole, the changes in the DC market call into question the fundamental purpose of the traditional UK life company business model," the Pensions Institute said in its report (95-page / 441KB PDF).
"By 2020 … certain well-known life companies will no longer exist in their present form. They will either be bought wholesale by a larger and more competitive life company, or they will be sold-off piecemeal as a series of books of business ... At this watershed in the long history of UK life companies, clarity of understanding of market conditions, together with a clear vision for the future, is essential for survival," it said.
The report said that the reforms, including automatic enrolment and the introduction of the 'freedom and choice' agenda giving individuals more flexible access to their retirement savings, had "broken the near-monopoly" of traditional pension providers. The DC pension provision market is now dominated by master trusts: large-scale, multi-employer schemes which in many cases "do not conform to, or even remotely resemble, the traditional life company", according to the report.
The Pensions Regulator is currently reviewing the master trust workplace pension market as a "matter of urgency", following concerns about their quality and sustainability, according to the report. Only six out of about 70 master trusts currently operating in the market have attained independent voluntary assurance of their quality to date, the Pensions Institute said.
"One key point is that there are no barriers to entry in setting up a master trust," said pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com.
"There's a vital role for the Pensions Regulator in addressing this behind the scenes, and the regulator should keep up pressure on master trusts to adopt detailed contingency plans. But the regulators should not put providers in a straightjacket - it's essential to allow room for innovation in the market. It's a balancing act, but one that deserves really careful handling from the Pensions Regulator and the FCA," he said.
The Pensions Regulator's voluntary assurance framework for master trusts was developed by the Institute of Chartered Accountants of England and Wales (ICAEW) and published in May 2014. It was created as a means of allowing master trusts to demonstrate compliance with the regulator's key quality features for DC schemes, which could then be used by auditors commissioned to provide independent assurance reports. Although the Pensions Regulator has made it clear that it expects the trustees of master trusts to obtain independent assurance, there is no legal requirement on them to do so.
Among the most likely reasons for UK market exit or consolidation flagged by the Pensions Institute in its report were the increasing cost of regulatory compliance, in particular the higher capital requirements that would be imposed on insurers under the Solvency II regime; and the potential growth of overseas markets. Consolidation would become even more likely depending on the outcome of the legacy policy review by the Financial Conduct Authority (FCA), and the Treasury's plans to reform the way in which pensions are taxed, it said.
Commenting on the pension tax review, the Pensions Institute said that the introduction of an 'ISA-type' tax model for pensions could "bring into question the continued purpose of life company tax wrappers for contract-based pension schemes and products".
"Pension-ISA taxation would also undermine the purpose of auto-enrolment for lower earners – the very category of private sector workers it was meant to benefit," it said in its report. "This, combined with the understandable fear that a future government might decide to tax withdrawals, contrary to the ISA tax principle, could eliminate the last vestiges of trust in long-term government pension policy."
The report also reinforced the need for consolidation and market exit to be "well-managed" by regulators and the industry in order to "avoid market instability".