The retirement industry needs to do more to fix the problem of small retirement plans that cannot achieve scale, says the U.K. minister for pensions and financial inclusion.
Speaking Wednesday at the Pensions and Lifetime Savings Association annual conference, Guy Opperman said small retirement plans, including "inactive" defined contribution plans known as deferred pots — those belonging to participants that are yet to retire — will pose challenges to providers and participants in the coming years. The number of deferred pots in multiemployer plans is forecast to grow to 27 million by 2025, from about 8 million, he said.
"We are looking at the problem of small pots. We need a better system for savers and industry," Mr. Opperman said.
The U.K. government has also proposed to reduce the number of smaller plans by placing additional disclosure requirements on them. These requirements will force trustees of plans with assets under £100 million (£129 million) to prove these small arrangements are delivering value for money. The government is consulting with the industry on the proposal.
The purpose of the new regulation is not to "frustrate legitimate business activity" but to "target mishandling and mismanagement" of plans, Mr. Opperman said.
Speaking on separate panel on solutions to reduce the number of small plans, Adrian Boulding, director of policy at the £2 billion defined contribution multiemployer plan NOW: Pensions, London, said participants tend to receive their savings at retirement in cash unless they manage to accumulate at least £30,000.
"We need to help members get to that (point) where they change from buying cash (strategies) to buying retirement income (strategies)," he said. Mr. Boulding added that the cost associated with maintaining deferred pots in the U.K. is estimated at over £100 million a year in aggregate.
The U.K. retirement industry needs to consider a combination of solutions, said Tim Gosling, head of pensions policy at the £11 billion multiemployer defined contribution plan, The People's Pension, West Sussex, England, which is sponsored by B&CE. Mr. Gosling was speaking on the same panel as Mr. Boulding.
In Australia, for example, superannuation funds use multiple strategies at once such as online tools, known as dashboards, the consolidation of deferred pots into separate vehicles and automatic consolidation of small inactive pots into active arrangements, he said.
The U.K. minister also said in his presentation that the upcoming Pensions Schemes Bill passed its second-reading stage in U.K. Parliament last week. Mr. Opperman said the bill will require that master trusts and large pension funds report on the climate impact of their portfolios against guidelines under the Task Force on Climate-related Financial Disclosures standards. Mr. Opperman added that the U.K. Financial Conduct Authority is working to align money managers with the requirements under its own rules, with an obligation to follow TCFD recommendations, to be effective in 2022. The obligation should be implemented at an investment strategy level, Mr. Opperman said.
In addition to better protection for plan participants, the U.K. government wants defined contribution plans to further diversify their investment options, he said, particularly into illiquid asset classes.