• Employers look for ways to mitigate the cost of compulsory contributions
• ‘Floor’ of 0.3% in charges could be created for the pensions industry
• Some players  in the investment management industry could benefit from around £6 billion p.a. of new NPSS funds

In response to today’s third and final report from the Pensions Commission, Deloitte, the business advisory firm, has identified the impact on the investment management and insurance industries as well as employers and employees.

David Robbins, Pensions Partner at Deloitte, comments on the impact on employers and employees: “Compulsory contributions are likely to cost employers an extra £2.3 billion per annum. Many companies are consequently looking for ways to mitigate this cost.  Trends show that employers are already beginning to plan for the future by re-engineering the way that they reward their employees. For example, they are adopting ‘flexible benefit schemes’ which will absorb the additional pension contributions within the overall employee remuneration package. 

“In addition, there is the likelihood that employers offering defined contribution schemes will increasingly view pensions in the workplace as a ‘hygiene factor’ of reward and level contributions down to the mandatory 3%”.

Current occupational pension schemes arrangements at risk:

• 4.5 million members of private sector schemes currently benefit from contributions which are higher than the proposed new rate of 3%
• Average employer contributions are currently 14.5% for defined benefit schemes and 6% in defined contribution schemes

Mark FitzPatrick, Head of the Insurance Practice at Deloitte, went on to comment on the potential impact on the life and pensions industry: “The prospects for private pension reform continue to present the life and pensions industry with both opportunities and challenges.  Lord Turner has left the door open for further debate on the benefits of using the existing industry infrastructure to deliver reform. The challenge for the industry is to compete on low charges and deliver value to consumers and, ultimately, for the solution to drive personal responsibility.  Reform will bring a huge amount of pressure on costs.  The NPSS aspires to set administration and fund management fees at 0.3% of funds under management, which could lead existing pension funds to challenge why they are paying considerably more.  This could mean that a 0.3% ‘floor’ for charges is created.”

The introduction of the NPSS would provide a real opportunity for a small number of players in the investment management industry.  David Logan, Investment Management Partner at Deloitte, explained: “NPSS could create a new, lucrative market for the lucky few in the investment management industry.  Around £6 billion per annum of new money could be accumulated by the investment industry.  The principal winners will be the companies that win the mandate to manage the default fund.  (Looking to the Swedish experience, most pensions end up in the default fund.)  It is important to note, however, that NPSS is encouraging low management fees, which suggests that low cost investment vehicles such as tracker funds will be used.  This more simplistic model opens up the opportunity to providers outside the traditional active fund management industry.”

John Connolly, UK Chief Executive and Senior Partner, Deloitte said: “We welcome Lord Turner’s final report today and see it as a positive step towards ingraining a savings culture in the UK.  Following the initial recommendations, it was vital that the industry was involved in the subsequent debate.  It was, therefore, extremely positive that industry bodies representing the life and pensions and investment management industries as well as employers were included by Government in the recent rounds of discussions on the future shape of UK pension policy.

“Until the White Paper on pension reform is released there is still a great deal of uncertainty about implications for the industry. However, it is highly likely that changes made to UK pension policy over the next few years will have a significant impact.”

Ends

Notes to editors
Find out more about the impact of the third and final report from the Pensions Commision.

About the Insurance Practice
The UK insurance practice at Deloitte delivers world class integrated professional advice to help clients make better informed strategic decisions, drawing industry insight and knowledge from industry specialists in risk, regulatory, audit, assurance, actuarial, corporate finance, consulting and tax. In the UK, we work with 18 of the top 20 life insurance companies and 17 out of the top 20 general insurance companies. Globally our insurance practices are made up of over 6,000 professionals who work for 18 of the top 20 global insurance companies.

About the Investment Management Practice
The UK investment management practice at Deloitte helps clients across the industry from large fund managers to smaller boutique firms and hedge fund managers.  As industry experts, we deliver a level of technical knowledge that remains unrivalled. Our client teams combine multiple perspectives – from regulatory to tax to IT to restructuring. As a member of the global organisation of member firms, the DTT network has an established investment management team in all key jurisdictions: London, Luxembourg, Ireland, the Cayman Islands, and the key European and US financial centres with the appropriate sector, tax and regulatory skills.

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