The Pensions Regulator (TPR) has called on trustees to consider saver cohorts based on contribution patterns when designing future default pension strategies.

In a blog from TPR director of strategy and communications, Patrick Coyne, the regulator highlighted the importance of understanding modern saver patterns when implementing default plans.

Coyne noted that the upcoming Pension Schemes Bill will mark a shift from a pension system built around savings to one focused on providing sustainable income in retirement.

Analysis from TPR showed that a five-year career break in the first 10 years of a working life could reduce the size of a pension pot by around 16 per cent at retirement.

With schemes preparing for default strategies under the guided retirement duty, Coyne highlighted an opportunity for trustees to recognise these patterns and design ‘smarter’ defaults based on the data they hold on people with similar characteristics.

“Working lives are uneven,” Coyne stated. “Contributions pause, earnings vary, and caring responsibilities interrupt careers.

“These patterns are widespread and economically significant - and our defaults need to reflect this.

“Earlier breaks remove contributions at the point where they would otherwise likely have the longest exposure to risk and hence returns.

“And because these breaks are disproportionately taken by women, and typically earlier rather than later in a career, the pattern we see is inherently an equity issue. A fairness issue.”

As trustees and providers already hold much of the data needed to understand contribution patterns due to lifestyling, Coyne argued that modest, evidence-based adjustments for certain cohorts could improve equity and help fulfil fiduciary duties.

“If the objective from pension saving is generating a sustainable income for savers, then strategy design must reflect systemic risk,” he continued.

“Clearly, this does not mean individual tailoring at scale. But it does mean understanding your members and seeing if there are perhaps one or two defined cohorts, where modest differentiation could really make a difference.”

TPR stated that it will support the development of secondary legislation with new guidance to help schemes meet their guided retirement duty requirements.

Innovation from the pensions industry had an important role to play, Coyne added, as legislation was not prescriptive on the model used or how income in retirement should be delivered.

While Coyne acknowledged that the UK pension system had made significant progress in participation, scale, and governance, he emphasised that the destination was not just participation, but also a sustainable income in retirement.

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