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28 Jan 2021

Eight ways pensions are about to get better

The long-awaited pensions dashboard programme will show costs and charges

A landmark Pension Schemes Bill - which will provide better protections for pension savings and help people plan for their retirement through the pensions dashboard programme - has been approved by parliament and will soon gain royal assent.

The Bill entered its final 'ping-pong' phase through parliament on 19 January; the House of Commons and House of Lords have been trying to resolve disagreements about the final text.

Which? has helped shape the Bill in order to get it through this process. This includes ensuring dashboards become a regulated activity as well as ensuring they're fully transparent about costs, charges and estimated incomes.

Other regulations put in place include protections of member investments, further protection from scams and provision for a new type of hybrid pension scheme aimed at boosting member pots.

Once the bill receives royal assent, it will become the Pension Schemes Act 2021, just over a year after it was first introduced.

Here, Which? looks at eight ways the Bill could help you to reach your retirement goals and safeguard your savings, ultimately, making pensions better.

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1. A personalised pensions dashboard

The Bill covers a variety of issues, but chief among them is the delivery of a pensions dashboard.

This will be an online portal that allows people to see all their pension entitlements in one place.

The Pensions Dashboard Programme, set up by the Money and Pensions Service (MaPS), has responsibility for designing and implementing the ecosystem.

Which? has long been campaigning for the introduction of pensions dashboards. The original government consultation on the dashboard relied extensively on our Which? Pensions Dashboard Report in 2018.

Because of our work on the Bill, pensions dashboards will be a regulated activity, meaning you will be protected from the risks of bad outcomes while using the full range of tools available on the system.

They're expected to be launched in 2023 and once they come into fruition, you should be able to find old pensions you may have lost track of and in theory, understand how much you have saved in them.

2. A full view of costs and charges

Which? also called on the government to provide greater transparency in the way key information will be presented on the dashboards, including costs, charges and estimated incomes.

It's vital that charges, in pounds and pence, are included from day one on dashboards, to give savers a full picture as they plan for their future.

3. No more dashboard delays

In Spring 2019, the government announced that there would be multiple dashboards, appearing on multiple online platforms with different functionality, alongside an 'independent' dashboard provided by MaPS.

The Labour Party tried to get an amendment passed that would have delayed the commercial dashboard rollout until the MaPS one was operational for a year.

Which? called for commercial and MaPS dashboards both being made available to consumers at the same time, and this was accepted by the government and included in the Bill.

Multiple dashboards could subsequently increase the reach of the service and encourage innovation.

Although, it's worth noting most of the data will be developed over time. The first dashboards will provide a 'find and view' your pension pots feature.

4. A new collective defined contribution scheme

The Bill will provide a framework for the operation and regulation of Collective Defined Contribution (CDC) schemes - a type of 'hybrid' pension scheme.

The existing UK workplace pensions framework enables employers to offer either of these options only:

These two models place all the risks and associated costs - economic, financial, and longevity - with either the sponsoring employer (DB) or the individual member (DC).

Under a CDC scheme, both the employer and employee would contribute to a collective fund from which the employee would then draw an income at retirement.

In other words, with a CDC scheme, the collective fund or 'pot' is shared between all scheme members, instead of each member saving into their own individual pot.

There have already been plans among schemes to switch to CDC. Following a long dispute over the closure of its DB scheme more than two years ago, the Royal Mail and its union expressed a wish to move to a CDC pension scheme for its 140,000 employees. Now legislation is in place, members will be moved to the new hybrid scheme.

Pensions consultancy Willis Towers Watson estimates that the expected CDC pension is, on average, 70% higher than a DC pot and 40% higher than provided under a typical DB scheme.

5. Stronger regulator powers

The Bill also includes a provision to strengthen the powers of The Pensions Regulator (TPR) - the UK regulator of workplace pension schemes.

There will be new criminal offences relating to pension plans, which includes a new power to issue civil penalties of up to £1m for schemes which don't comply with its rules.

This means your pension will have better protection from scams and fraud. For example, if your company hasn't enrolled you in a company pension scheme, as required by law, provided you meet the qualifying criteria.

6. Better checks on DB funding and investment strategy

There's also a new requirement for DB schemes to have a 'funding and investment strategy' for providing pension benefits in the long term.

This means such schemes must disclose the 'funding level' - how its current market value of assets compares with its liabilities - to TPR.

In recent years, a number of big-name companies have gone bankrupt, plunging thousands of employees' livelihoods and, crucially, their DB retirement savings into turmoil.

There is a safety net to provide some relief - the Pension Protection Fund - although it typically pays out less benefits than your scheme would.

With the new requirements, TPR can report back to schemes to help them to put a recovery plan in place and, therefore, help to safeguard your benefits.

7. Your pensions will be 'greener'

Schemes will also be required to manage the effects of climate change as a financial risk when investing your money and disclose how they've done so.

According to the Department for Work and Pensions (DWP), climate change is a 'major systemic financial risk and threat to the long-term sustainability of UK private pensions'.

Schemes will need to have a system in place to identify, assess and manage climate-related risks and opportunities.

For example, some funds may choose to divest from fossil fuels or aim to exclude producers and retailers of meat, poultry, fish and dairy when investing your money (read: how to make your diet more planet-friendly), while ensuring you still get decent returns.

The largest UK schemes with £5bn or more in assets will be required to publish climate risk disclosures from October 2021.

The requirements outlined above will extend to schemes with more than £1bn in assets from October 2022 and the end of 2023, respectively.

8. Better protection for DB scheme transfers

To help protect savers from scams, members will be required to evidence a 'genuine employment link' between a member and an occupational pension scheme, if they wish to complete a DB to DC pension transfer.

If you do decide to transfer your final salary pension, the amount you get to invest is known as the 'cash equivalent transfer value', which is calculated by your final salary scheme. You must then invest this 'amount' in either a pension scheme with another employer or a personalself-invested or DC pension.

Scammers commonly try to persuade pension savers to transfer their entire pension savings, or to release funds from it, by making attractive-sounding promises they have no intention of keeping. It's hoped the new rules will prevent future scams.

This story was published on 28 January 2021 but has since been updated. Point 7 now includes an example of a pension scheme becoming 'greener' by divesting fossil fuels and a link to a story on how food impacts the environment. The change was made on 11 February 2021.