Unveiling in his proposals to reinvigorate workplace pensions – a long-standing pledge of the UK’s coalition government that critics noted, until that point, had yet to be addressed – pensions minister Steve Webb argued that continued inaction in the area of occupational schemes was simply not an option.
Webb said in November: “If we simply stand by as too many previous governments have, another generation could miss the chance to put something by for their old age.”
The Reinvigorating Workplace Pensions paper, the culmination of Webb’s time in office to date, details how the Department for Work & Pensions (DWP) could go about introducing defined ambition (DA) plans, offers an opinion on the question of scale within the UK system and suggests that auto-escalation of contributions should be a policy launched to complement auto-enrolment.
Ahead of the paper, Webb hinted at various ideas for greater risk-sharing within occupational funds. Mentioning defined benefit (DB) light and defined contribution (DC) plus, or the possibility for smoothing fund returns by virtue of a protection fund for DC members, the former academic seemed to be brimming with ideas – although some within the industry quietly say that his proposals are “quarter-baked”.
But, Andrew Vaughan, chair of the Association of Consulting Actuaries (ACA) and the DWP’s working group on DA, argues in favour of a “can do” approach on pension design. “All too often, when we have proposed new pension designs, we have heard the comment from one quarter or another that ‘you can’t do that!”
The National Association of Pension Funds (NAPF) was one of the organisations to seemingly offer a less than glowing endorsement for DA. According to chief executive Joanne Segars, there “could be room” for a middle way, and it is “certainly worth exploring”.
The paper outlines a number of ways risk-sharing could be allowed – including the existing career-average revalued earnings approach for DB funds, cash-balance schemes (most recently used by retailer Morrisons as its new auto-enrolment option) and hybrid funds – but also nearly a dozen other ideas, with varying degrees of detail within the paper.
Anthony Arter, head of pensions at law firm Eversheds, notes that most of the proposals are reduced to giving employers a choice over what kind of risk they are willing to underwrite in future, rather than having a DB fund with the whole range of liabilities.
“However, granting employers this flexibility will require some brave political decisions to be taken because it will mean removing – for the future, at least – some of the benefits and protections employees with defined benefit pensions have enjoyed,” he says.
One of the proposals is in fact a DB fund that would no longer offer members spousal benefits, while another would follow somewhat in the footsteps of the Dutch system and allow for conditional or optional indexation.
Paul Macro, head of DC at Mercer’s UK business, is sceptical about doing away with spousal benefits, noting that their cost is minimal.
He says it is also questionable how easy it would be to get companies to once again take on any liability if they have already successfully transitioned to fully fledged DC.
“They might persuade some organisations that currently have DB in some form or another not to go all the way to DC,” Macro concedes. This would appear to be Webb’s hope, who over the last year regularly spoke of the need to stop the risk sharing ‘pendulum’ from swinging all the way to DC.
However, Macro says that, for companies to be able to take on this risk-sharing, there would still need to be open DB funds by the time the laws make it onto the statute books.
Arter assumes a more positive stance. “Encouraging employers to take on some risks has to be better than employers being left with little choice but to take on no risks at all.”
Creating a DA fund or investment option within DC is perhaps more easily done. But, as the DWP itself notes, employers would be unlikely to meet any levy – whether to smooth returns or offer a guaranteed level of funding – and that would impact the size of any pension pot.
Macro questions whether any guarantee or insurance would be needed for younger members, and points to existing lifestyle funds already reducing risk for certain age cohorts.
He says that, despite the large number of proposals outlined by the DWP, he prefers being presented with all options. “Chances are they would have [otherwise] picked the wrong ones,” he says, noting that what works on paper in Whitehall is not always practical outside of it.
In fact, according to the DA working group’s chair Vaughn, the number of possible approaches is less than accidental.
“Our working group envisages there will be a range of DA designs – no single approach – so employers can select schemes that suit their business and their employees best.”
It remains to be seen how many of the suggestions outlined by the DWP are realised, although the NAPF appeared heartened to see that their calls for greater scale within the DC sector had not fallen on deaf ears.
However, Macro dismisses any suggestion the paper should not have featured ‘workplace’ prominently in its title, rather examining the Dutch, Danish or Australian approach to industry-wide funds or schemes open to all white-collar workers.
He says it should have perhaps instead been titled ‘Getting better workplace pensions’, but that, due to auto-enrolment, occupational schemes had been granted “the biggest shot in the arm [they have] ever had”.
“Pensions and the workplace are now inextricably linked, and there is no going back from that.”