The UK government’s defined ambition (DA) agenda should see it consider a system similar to Denmark’s ATP, pensions minister Steve Webb has suggested.
Offering a glimpse of which ideas a forthcoming paper on DA would examine, he said the Department for Work & Pensions (DWP) had “honed down” the list of proposals over the large number contained within last year’s consultation.
The Liberal Democrat minister admitted he was working to a dual deadline, trying to implement change before the next general election in 2015, but also conscious of the potential changes companies could implement, as the end of contracting out of the state pension causes sponsors to reassess their defined benefit (DB) schemes.
He said that, due to the prevailing mood that defined contribution (DC) was the future, several proposals allowing “firms to go the extra mile” within the system would be put forward.
“Could we go down a Danish-style route, an ATP-style route, where a bit of what you’ve got is guaranteed and a bit of what you’ve got is variable?” he asked.
Webb admitted that one of the challenges of such an approach would be the “hefty” solvency requirements associated with any such level of guarantee, but he said existing models could allow for guarantees “at a much more affordable cost”.
“Or could we go down a collective DC (CDC) model, which is not certain, but it may have reduced volatility and better average outcomes, depending on how you passed it?” he asked.
The minister suggested the retention of DB models, even without “any of the bells and the whistles”, would be his goal.
“It will still be a pension that’s linked with what you used to earn,” he said. “For me, that’s the golden standard.”
He has previously said the end of contracting out of the state pension removed the rationale for occupational schemes needing to provide indexation protection, and his department has also floated the idea of stripping DB funds of spousal benefits.
He also said DA would allow for an element of flexibility.
“What we want to do is not prescribe, not set down a law that says ‘there are three ways you can do pension, and here’s what they are’, but to say ‘here’s a set of models, you can choose’,” he said.
Webb did not directly reference previous proposals for a DC smoothing fund during his speech, but Pension Protection Fund (PPF) chief executive Alan Rubenstein addressed the issue in his own keynote earlier the same day.
“There was for a while talk, as you know, of a DC PPF, and we’ll obviously have to wait for the consultation document,” he said.
“But my sense is that has now, as you say, gone on the back burner, and we are really much more talking about the idea of ‘do we want Dutch style-CDC, or do we want Danish-style ATP?’”