With a General Election fast approaching and the potential for a new party leading the country, there’s a lot for you and your clients to look out for across the rest of 2024. The Government continues to advance a long list of proposals, some with more speed than others, and the Chancellor also added a couple of new ideas into his March Budget. The Labour Party has begun to indicate what it may have in mind for pensions, investments and the wider financial services sector – some similar and some different from the Conservatives. On top of all that, we have regulatory initiatives being rolled out, some of which link into the (current) government’s agenda.
Here I’ll provide an update of ‘latest developments’ across a range of initiatives, namely:
- Defined Contribution pension investments
- UK ISA
- Pension dashboards
- Value for Money framework
- Pot for life / lifetime provider
- Labour Party’s Plan for Financial Services
See separate articles for my views on the Advice Guidance Boundary review and the Retirement Income Advice Thematic Review.
Defined Contribution (DC) pension investments
You may have seen we (Aegon) signed up to the Mansion House compact last year, committing to invest 5% of our workplace pension default funds in private equity by 2030, provided in member interests. We believe a modest proportion of private equity in workplace pensions could deliver better member outcomes, through diversification and potentially higher returns, despite concerns around higher charges and illiquidity.
As well as looking to encourage DC schemes to invest more in private equity, the latest Budget also included a proposal requiring DC pension funds to disclose the level of their investment in British businesses by 2027. While positioned as part of Value for Money reforms, I see this as firmly part of the UK growth agenda. The Chancellor even threatened ‘further action’ unless there are signs of a ‘positive trajectory towards international best practice’. Note that the Mansion House Compact’s commitment to private equity isn’t specific to UK private equity.
While a Labour government might take different approaches, the indications are it would also look to use pension scheme investments as a source of economic growth and also encourage a greater UK focus. Its recently published document Financing Growth Labour’s Plan for Financial Services (more on this later) suggested a ‘Tell Sid’ style buy British campaign.
Advice considerations
Whether you’re advising corporate or retail customers, these government aims are likely to prompt questions around new approaches to investments. The FCA’s Long Term Asset Funds, now opening up to retail investors, could add to these. Private equity and illiquid investments are complex areas requiring your expert advice and will feed through into advice opportunities.
The UK ISA
The Easter bunny in this year’s Spring Budget was the UK ISA and it’s proven controversial. We can all understand the Chancellor’s aim – to get more money invested in the UK economy. But is the creation of yet another variant of the ISA family, with an extra £5k allowance to invest in UK businesses (however defined) the best way forward? How much complexity will this bring and how restrictive will the rules – such as no transfers into other forms of ISA – prove? Hopefully the Consultation will help answer these questions.
There’s also the not-so-little question around how the Chancellor’s product fits with the FCA’s Consumer Duty. Firms must design products with a particular market in mind and this one will be very niche – likely restricted to those already maxing out their £20,000 allowance in Stocks and Shares ISAs. Providers and adviser firms must also avoid causing foreseeable harm, so the lack of diversification needs considered. Finally, products must provide good value – which with substantial development costs, a narrow target market and a £5,000 per year investment limit could prove challenging.
I do wonder if an alternative way of encouraging a wider range of investors to consider buying British might be to have a clear flag of ‘% in UK equities’ prominently displayed across all investment products.
Advice considerations
Treasury officials have admitted this is unlikely to launch in the current 2024/25 tax year. In the meantime, we have a General Election and it’s unclear if a Labour government would support this. If it does go ahead, you could consider which of your clients might find this appealing and how to support any wider geographical rebalancing of portfolios.
Pension dashboards
Some said they’d never happen. But in recent weeks, there’s been a flurry of activity around pension dashboards, making the reality of pension dashboards more certain. This includes:
- A new regulated activity definition of operating pension dashboards services (PDS).
- Publication of ‘connect by’ dates to the pension dashboard ecosystem by provider / scheme membership size, largest first, starting April 2025, ending October 2026.
- A new FCA consultation paper proposing some updated rules for PDS providers, with final rules and guidance expected in Q4.
While Labour hasn’t been particularly vocal on dashboards, I see no reason why they’d want to derail them particularly at this late stage.
Adviser considerations
While consumers won’t be able to use dashboards until some time in 2026, you might wish to start thinking about how these will support services you already provide and how they might create new advice opportunities. I’m particularly pleased to see the FCA proposals include provisions to help users of dashboards find an adviser and to use central infrastructure to grant their adviser permission to view their data on their chosen dashboard.
Value for Money (VfM) Framework
Work on this combined DWP, The Pensions Regulator and FCA initiative is progressing. As part of the March Budget, the Chancellor announced that schemes will need to be assessed against competitor schemes, including at least two with assets of over £10 billion. Furthermore, poor value schemes wouldn’t be allowed to take on new business from employers.
I’m also intrigued by the new way both the Spring Budget pack and Nikhil Rathi at the FCA are describing the VfM criteria. They’ve moved from talking about gross investment performance, costs and charges and quality of service metrics to ‘investment performance, costs and other metrics’. Is this suggesting the quality of service metrics are proving more challenging to define?
The FCA is due to publish its own VfM consultation shortly, setting out its rules for FCA regulated pension schemes. If the FCA moves faster than the DWP, which needs time to legislate, we risk having slightly different rules and timings for contract-based and trust-based pension schemes.
The VfM framework will become a key building block underpinning many other pension initiatives designed to improve member outcomes and I expect Labour will want to see it continue.
Advice considerations
The immediate advice opportunities will be for those advising trustees of DC schemes which need to comply with the framework. They may require support to work out whether they’re good value, and if not, how to make improvements. In the worst-case scenario, they’ll need help to wind up and consolidate into a larger, better value scheme. Longer term, there will be a whole new source of data and insights across all pensions to factor into advice.
Pot for life / lifetime provider
Alongside ongoing plans to authorise the creation of a limited number of small pot consolidators, we recently had a government call for evidence on introducing a pot for life or lifetime provider model. While the idea of small pot consolidators will sweep up existing small, deferred pots of under £1000, pot for life aims to stop the creation and proliferation of new pension pots, small or large.
This has proven highly controversial. Do we want to radically reform auto-enrolment? How will employers react if their workforce doesn’t want to use the employer’s chosen workplace pension and demands contributions go instead to their vehicle of choice? Might they cut back on contributions or their promotion of pensions in the workplace? Could we see weakening of economies of scale and higher charges for the disengaged majority?
The latest update, again within the Budget, is that while the Government remains keen to explore this further, it will take its time and consult employers and employees. That pushes this beyond the Election and potentially into the very long grass if not off the pitch entirely.
Financing Growth – Labour’s plan for financial services
Labour’s document on their plan for financial services is well worth a read and gives some real insight into what could be in the Labour Party’s manifesto. While it doesn’t touch on the potential to reinstate the pensions lifetime allowance – something I’m sure advisers, providers and pension schemes universally dread – it does give a number of insights elsewhere.
Labour clearly sees the financial services industry as a source of economic growth, just like the current government. It wants to encourage greater investment in UK and in private assets and sees the sector as key to delivering climate transition and green technology.
In terms of regulation, I spotted quite a few points of interest in terms of Labour’s plans and what it supports:
- Advice Guidance Boundary Review proposals – great to see cross-party support for initiatives such as targeted advice.
- Auto-enrolment – the cross-party consensus holds strong, but it would be good to see where each party stands on future enhancements, including the much-delayed 2017 reforms or even longer term moves to increase contribution rates.
- Scheme consolidation – Labour will encourage this, granting new enforcement powers to The Pensions Regulator.
- Streamlining FCA rules – they’ll ‘direct’ the FCA to consult with the industry on streamlining its regulatory rulebook, removing rules no longer needed post-Consumer Duty – that will be interesting!
- Identifying overlaps and gaps – they’ll look across regulators including FCA, PRA and TPR.
Perhaps the most intriguing reference is that Labour plans to review the pensions landscape as it has developed since 2000, considering if it supports sustainable retirement incomes and best possible investment returns. To me that sounds pretty far-reaching.
More to come in 2024
We have a very interesting period ahead of us as we move through 2024 and beyond. Whoever is in power, I expect many new developments and a huge range of advice opportunities. Look out for my further updates and thoughts throughout the year.
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