UK – The UK pension industry has welcomed the Department for Work and Pensions’ (DWP) proposals for “reinvigorating” occupational pension schemes – including ideas to bring about greater risk-sharing through a number of proposed defined ambition (DA) models – but called for government not to be distracted from ensuring members of defined contribution (DC) schemes are offered the best value for money.
Responding to the department’s long-awaited paper, ‘Reinvigorating workplace pensions’, the National Association of Pension Funds’ (NAPF) chief executive Joanne Segars warned that the idea of defined ambition would not be for everyone, especially at a time when many were being auto-enrolled into existing funds.
Announcing the paper, pensions minister Steve Webb however said that auto-enrolment was only the start – it was now his goal to ensure people were saving into “high-quality, value-for-money pension funds”.
“Now is the time to reinvigorate workplace pensions, 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 coalition government’s consultation touched on a number of issues relevant to the industry as a whole – from governance, through scale of funds to the possibility of introducing risk-sharing without forcing fully-fledged defined benefit (DB) on companies.
Outlining the proposals for defined ambition, the paper offered more details of how Webb’s previously announced idea for a DB fund that becomes a DC arrangement upon the employees’ departure would function – saying that any accrued benefits would be “crystallised” at such a point.
“This model would balance encouraging retention and rewarding long-term employees with DB-type provision, with the employer only being responsible for funding and risk proportionate to its active workforce,” it said, noting that it would further reduce the burden of longevity post-employment.
Considering how a DA fund could work if using a DC scheme as a starting point, it noted that the introduction of guarantees – “offered by employers or insurers or possibly by a Pension Protection Fund-style protection fund” and paid for through a levy on member contributions – would be a further possibility.
“Unlike current DC,” the paper explained, “the individual would be guaranteed to get back the contributions they had paid in at the crystallisation date, for example when they retire or at death.”
It added that such guarantees would only be in place on specific fund options, such as the default, with the paper noting that the guarantee could also be funded by employer contributions and relate either to a ‘money back’ promise on a lump sum, or retirement income basis.
Examining the feasibility of an employer-funded smoothing fund for DC returns, it said that ‘core’ contributions could be transferred to such a pooled vehicle and that, depending on returns, benefits over and above the minimum guarantee could continue to grow “unlike standard deferred annuities”.
The DWP also once more examined the possibility of collective DC (CDC), but cautioned that there was still a “significant range” of outcomes in such a vehicle and questioned the intergenerational fairness of the approach, noting the problems currently suffered in European markets employing similar models.
The paper further looked at the impact of scale in the pensions market, a issue repeatedly raised in the past by the NAPF, noting that larger schemes had better track records on engagement and governance issues.
It questioned how to best achieve this scale, highlighting the example of Australia where trustees had a duty to examine if members were impacted by a fund’s lack of scale and said that alternatively, multi-employer funds could only be granted a licence if they were able to achieve a certain scale.
The NAPF’s Segars accepted that there could be space for a measure of risk-sharing within the pension world – a long-stated ambition of Webb’s, who has lamented the shift from DB to DC – and said that some larger employers might be interested in a DA fund.
She added: “It is important that we do not get distracted from the task of getting good value for money out of the DC pension model. We need to improve transparency around charges and explore economies of scale.”
Morten Nilsson, chief executive of Now: Pensions, added that there was a need to create a savings culture in the UK, but dismissed out of hand any attempt to re-impose liabilities on employers.
“Employers don’t want liabilities, so it is not only cost[s] that need to be considered for quality,” he argued.
Eversheds law firm meanwhile commended Webb for “throwing down the gauntlet”.
The company’s head of pensions Anthony Arter said: “[The paper] contains some radical ideas for how things could be done differently and I hope that it leads to concrete changes being introduced.”