The three options for defined ambition pensions laid out in a consultation launched today have met with a mixed reaction from different corners of the industry.
The TUC has attacked the first category of DA, a DB-lite approach that would allow greater flexibility around salary-related benefits such as removing mandatory inflation indexation. Other stakeholders have said any relaxation of DB requirements is ‘too little, too late’, and is unlikely to bring employers back to the structure.
The second class of DA – more secure DC outcomes underpinned by employer guarantees – has been attacked by PWC as being out of step with employers’ reduced appetite for taking on pension obligations on behalf of employees.
But there has been widespread support for improving certainty of DC outcomes through greater guarantees and Dutch-style collective risk-sharing DC models.
The consultation, ‘Reshaping workplace pensions for future generations’ contains proposals for creating a new pensions regulatory framework that would allow for greater risk sharing between parties, removing regulatory barriers to allow for a new flexible form of defined benefit pensions that will enable employers to continue to offer pensions to members with a high level of certainty, but with much greater flexibility over the nature of benefits provided – these flexibilities will apply to future accruals only within existing DB schemes.
Minister for pensions Steve Webb says: “Final salary pensions have been in long-term decline and if we do not act it could disappear altogether. We want to help the best employers offer good alternatives including new forms of salary-linked pensions.
“We have looked at the best pension arrangements around the world and want to give British workers the chance to join such schemes. Our proposals for defined ambition pensions are designed to reinvigorate workplace pensions, providing people with more certainty about what they will get in retirement.
Andrew Vaughan, chair of the industry working group and president of the Association of Consulting Actuaries says: “The proposals offer a range of new options that will be attractive to different employers and their employees – all part of a new framework that looks beyond the current regulatory extremes of final salary and money purchase.
Hargreaves Lansdown head of corporate research Laith Khalaf says: “Under this new proposal workers could save diligently throughout their lifetime, only for the rug to be pulled out from under them at the last minute. The government is trying to manage the decline of final salary pensions, but flexible defined benefit schemes will be complicated, costly and will create huge uncertainty for pension savers about what pension income they can expect.”
TUC head of campaigns and communications Nigel Stanley says: “There are many interesting ideas in this paper to explore further. In particular we think that sharing risk between members in well-governed and large-scale collective DC schemes can make members’ savings work harder and deliver better retirement income.
“As the bulk of employees will be in auto-enrolment scheme where employers will not wish to take on any risk, building on DC is the priority. Getting scale and member aligned governance will require government to take a strong lead as this will represent a real challenge to the many existing schemes run for profit.
“We remain sceptical however that deregulating defined benefit pensions will change employer behaviour. Employers willing to accept pensions risk already have many ways to negotiate changes to reduce costs, and we are particularly opposed to abolishing indexation as that just means pensioners getting poorer every year.
“In a nutshell: DC-plus good, DB-minus bad and DC plus with adequate contributions best of all for new auto-enrolled savers.”
PWC head of pensions Raj Mody says: “The stumbling block will be whether companies have the appetite to provide these types of pensions. Regular revisions to pension rules have left employers disillusioned, with little appetite to take on any more risk than they need to.
“If the financial services market can develop products which meet the characteristics of the ideas outlined by the DWP, and with reasonable costs and charges, then employers will be much more prepared to adopt them. But I doubt many employers will want to initiate these kinds of protections for members and underwrite them directly, for fear of future governments ramping up the regulatory burden.
“The cost of trying to provide guarantees to defined contributions pots could be both expensive and prohibitive for employers and providers so there could be more value in educating scheme members as to how their pension scheme works and the risk and rewards that come with their investments.
“The proposal to create a slimmed down defined benefit (DB) version is welcome but sadly is likely to be too little too late. The challenge will be persuading employers to move back towards an arrangement where they are tied into a pension promise, as so many have swung away from offering DB schemes. For a noticeable shift in company provision back to anything with a DB element, you would need to remove more than just the compulsory inflation-linking promise but also give more flexibility around areas like reacting to dramatic improvements in longevity for example.”
Hymans Robertson partner John Walbaum says: “The emphasis of today’s paper is on the need to give people greater certainty of income in retirement. We agree with the aim but less with DWP’s approach to getting there.
“Our research shows that employers are much more willing to support DC based pensions that guide people to a target income rather than the traditional solutions put forward in today’s paper. Employees too are receptive to their employer taking a more active role in managing their pension with 43% of DC savers saying they would prefer it if someone else took care of their pension. Employers need to take a more hands on approach to ensuring workers save enough and guide people towards a target retirement income.
“The DWP is proposing changing the legislative environment to make salary related retirement benefits more attractive to employers. In our view much of the infrastructure for risk sharing already exists. If there was a substantial appetite amongst employers for greater risk sharing, we would be seeing more employers pursuing defined benefit arrangements. For example, cash balance plans.
“Employers have invested heavily in DC in recent years and are unlikely to return to defined benefit unless they are compelled to do so.”