UK actuaries have called for the country’s benefit system to be “radically simplified” in order to cut costs and make transfers and consolidation simpler.
The Association of Consulting Actuaries (ACA) has published a report in partnership with insurance company Royal London proposing the introduction of a “pensions pound” – a way of standardising various forms of accrued defined benefit (DB) rights into one format.
Steve Webb, director of policy at Royal London and former pensions minister, has previously voiced support for a similar concept. He said there was “a huge prize to be had if the complexity of individual pension rights could be turned into a set of standardised rights of equivalent value”.
“This would mean less money was spent running schemes and explaining complexity and could pave the way for greater understanding and better value for money,” Webb added. “This should be part of the government’s forward agenda.”
UK DB schemes often have several different sections relating to different rates of accrual or indexation, as a result of rule changes or corporate mergers or acquisitions.
The ACA and Royal London’s report outlined how benefits could be converted to a common standard “on an equivalent actuarial basis… using a set of suitable forward-looking assumptions”.
The model included moving benefits to a single standard for indexation, which the report said would mean that “initial pensions for many members will be higher than at present when they come into payment” – implying higher liabilities for some schemes.
Its authors acknowledged that the concept would need to be “carefully designed” to ensure it did not change members’ benefits adversely. It would also mean changes to the level of compensation provided by the Pension Protection Fund when a DB plan sponsor becomes insolvent.
However, the report argued that the challenges were worth overcoming as the standardisation would aid several government and industry projects, the report said, including the pensions dashboard and DB plan consolidation.
The report also claimed the cost of running a DB scheme could be reduced by as much as 50% in some cases through lower administration costs.
“Ranking pension rights by their value in pension pounds would help people compare their rights under DB, [defined contribution] and state pension systems,” the report said. “This could be useful in presenting information via a ‘pension dashboard’ and will help members understand potential savings gaps.”
Faith Dickson of the Association of Pension Lawyers, which gave legal guidance on the report, said: “It’s so important for schemes to be able to focus on member security rather than complex administration, and pension simplification would be a huge step towards achieving this.
“Preserving historic complexities of pensions as we are doing now is doing members no favours, when simplification would provide the same value benefits and let schemes focus time and money on the best way of securing those benefits for the same value and let schemes focus time and money on the best way of securing those benefits for them.”
The report is available here.