The future of UK pensions, delayed and confused

From the FT (12/7/2023)

By Helen Thomas

The UK pensions system still doesn’t know what it wants to be when it grows up. That is the impression left by a flurry of consultations, calls for evidence, government responses and reports published after Jeremy Hunt’s Mansion House speech. The frantic airing of ideas and soliciting of views doesn’t inspire confidence that there is a clear “direction of travel”, as promised by the chancellor.

That is most obvious when it comes to the future of DC schemes, the most important area in terms of inadequate pension provision and, ultimately, the opportunity to invest more adventurously. DC schemes, where workers and employers put money into an individual pot to fund retirement, are on their way to becoming the largest part of the pensions market.

Old-style private sector defined benefit schemes will increasingly be bought out by insurers, thanks to improvements in funding levels as interest rates have risen. By the end of the decade, the UK could (very roughly) have £900bn of pensions in the insurance world, £800bn left in defined benefit schemes and — thanks to automatic pension enrolment rules that came in about a decade ago — £1tn in defined contribution.

In fairness, the government is making sensible moves to try to tidy up small DC pots, offer savers an easier set of options at retirement and increase trustees’ focus on value for money. The longer-term ambition is to have bigger pots of money, better managed, investing more in higher-returning assets and delivering better outcomes for savers. The government said it will “facilitate” consolidation. But the easy wins from simply merging subscale schemes are overstated. The number of DC schemes has already fallen from 55,000 in 2008 to about 27,000. And 95 per cent have fewer than 12 members, according to the Association of British Insurers, of which 84 per cent are executive pension plans rather than workplace schemes.


The article also looks at the Australian DC system and the Dutch model of collective defined contribution (CDC) schemes while noting “the latest efforts have yet to change the delayed and confused state of UK pensions policy.”

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