The government has set out proposals to rebuild confidence and trust in workplace pensions.
Its paper, Reinvigorating workplace pensions, contains new ideas for sharing the risks more equally between employer and employee, and for helping UK workers get the most out of what they save in a pension.
The report includes more details on a defined ambition pension scheme, which has been put forward by Steve Webb, minister for pensions, as a way of bridging a perceived gap between defined benefit (DB) and defined contribution (DC) pension schemes. With a defined ambition pension, the risks would be shared between the employer and the employee, offering greater certainty to savers around the final value of their pension pot than in DC plans, and less cost volatility for employers than with DB schemes.
A number of potential new models for the defined ambition pension scheme are outlined in the report:
- Conversion of benefits, where the employer promises a defined level of benefit, and when the member leaves the scheme by retiring or leaving the employment, the benefit is converted to a cash lump sum of an equivalent value, either to purchase a retirement income, or transfer to a DC scheme.
- Moneyback guarantees, where a guarantee ensures a saver gets back at least what they put in, could encourage more people to remain in a pension and save for their old age. One way of doing this would be to have a moneyback guarantee funded by a levy on members’ funds. While an employer might opt to pay the levy for an individual, it is likely the payment would be made by the member, relative to their funds. The cost could be kept down if this were a mutualised fund guarantee, for example, provided as not-for-profit by the private sector, or a government-sponsored but industry-funded body, similar to the Pension Protection Fund.
Other recommendations in the report include:
- Monitoring pension charges regularly across the pensions industry. The minister would reserve the power to cap charges if such action becomes necessary.
- Exploring the idea of a ‘star-rating’ system for pension schemes with the industry. This could include charges, good governance and transparency.
- Working with the pensions industry to look at whether a pensions market with a smaller number of larger scale, multi-employer pension schemes might offer both employers and employees value for money.
- Escalating pension contributions. Automatic escalation would be a way to encourage people to contribute beyond the statutory minimum that is required with auto-enrolment.
- More transparency around annuities, following on from the Association of British Insurer’s consultation into a compulsory code of conduct.
Webb said: “Automatic-enrolment is a huge step forward, but it’s only the start; we must ensure people are saving in high-quality, value-for-money pension schemes.
“For nearly half a century, we have seen declining numbers of people in workplace schemes. I am determined to reverse this trend and ensure we have pensions that are affordable to employers and attractive to employees.
“To rebuild confidence and restore trust in our pensions system, we need better value-for-money, good governance and greater transparency. The ideas we are publishing show the progress we are making on these issues.
“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 paper draws on extensive discussions with pension providers, actuaries, investment firms and lawyers, including an industry working group led by Andrew Vaughan, chair of the Association of Consulting Actuaries.