The Easter break witnessed the possible commencement of another state-led initiative on the pensions front. Many of you will have heard The Minister for Pensions, Steve Webb MP, speak on the national media about what he terms a ‘defined ambition plan’.

The background to this subject is the changing face of the UK Pension Savings market.

For the uninitiated, a whirlwind tour of the last 20 odd years:

At the beginning of the 1990′s, if you were lucky enough to be in a company supported pension scheme, there was a good chance that it was a Defined Benefit (DB) scheme. These schemes did exactly what it said on the packet. For every year worked, the scheme promised a guaranteed (or defined if you prefer) level of annual pension income in retirement.

This was clearly good news for the employee, as apart from making their own contributions, all the other risks, variables, and decisions were managed on their behalf.

The problem, as so many of you have heard me say over the years, is that all the risks sat with the sponsoring employer. And the variables in providing a defined benefit were many, and mostly way outside of the employer’s ability to influence or control.

Rampant life expectancy increases, low equity returns, poor interest rates, and some rather rushed legislation in response to the Robert Maxwell saga, all played a part in making DB schemes little more than a ‘blank cheque’ on the employer.

And no commercial organisation can allow too many blank cheques to be written, and still hope to survive.

Understandably therefore, many (in fact most) employers did the sensible thing, and retreated from DB provision. Many did this reluctantly, and only after trying a range of solutions. This departure from DB is now almost complete in the private sector.

Yet employer’s still wanted to support their staff with pension savings. Many eventually opted for Defined Contribution (DC) plans. As the name suggests, the employer knew exactly the level of contribution to be paid for each employee, each year. This was possible as no guarantees of the resultant level of pension are inherent in DC offerings.

So a signficant improvement for the employer. Known costs and no hidden nasties, and generally these schemes were significantly cheaper to administer as well. Plus the employer was still doing more than their bit in helping the employee save for his/her retirement.

The problem was that the variables which destroyed DB provision were still present, and are now appearing in the average DC pension pot instead. Put simply, the employee is now exposed to the risks. As such, the individual is never certain of their likely retirement income until they actually reach retirement.

Now some of these risks can be managed and/or mitigated by careful planning, fund selection, and good advice and consultancy. But some of the underlying factors (for instance life expectancy) remain outside of anyones control.

And other issues have also entered the field of play.

My blog post earlier this year ( https://www.jelfgroup.com/blog/2012/01/undersaving-britain/ ) highlighted that the numbers actively saving for their retirement was dropping alarmingly. This suggests disengagement with pension planning. And the recent dip in the UK’s economic fortunes is unlikely to help the retirement savings picture either.

All of which makes Auto-Enrolment necessary, if only to get more people actually saving for their retirement. What it does not solve however is the underlying problems of managing the risks associated with pension planning.

Now, before proceeding further, I would like to make it VERY clear that I am NOT saying that DC pensions (or any other pension savings for that matter) are a bad thing.

It is clearly better for an individual to be saving for retirement, than not.

And the tax-breaks inherent in UK pensions, plus of course generous employer contributions and other benefits (again often funded by the employer) still make DC pensions a compelling benefit.

But the fact remains that DC pensions are exposed to the same outside factors that did for DB pensions. And of the factors that I have listed earlier in this post, perhaps the most alarming is largely anecdotal. Amongst savers, there is seemingly a level of disenchantment with pensions plans to deliver their retirement solution. This needs to be tackled sooner rather than later if the UK is to avoid a massive financial calamity in the fairly near future.

And if you doubt this is such a problem, here are two statistics taken from the national media that are almost frightening in their simplicity:

• It is estimated that a third of all babies now being born will live to be 100.
• 10,000 people celebrated their 100th birthday in 2011, and in 2026 that figure rises to 500,000!

Contrast these statistics with the plain fact that little more than a third of the working population are actively saving for their retirement, and the point is surely made. Many more of us can now expect a rather long retirement, and unless action is taken quickly, this could be an impoverished existence.

Which leads us back to our starting point, The Minister’s proposals last weekend.

What Steve Webb is looking for is a more balanced approach to the risks, where neither employer or employee shoulders all the burdens. To borrow from a previous prime minister, perhaps there is a third way?

I (and I would hope the industry) really welcome this initiative. Something needs to be done, and the impetus from the top must surely help the conversation.

The Minister’s initial proposals seem to centre on providing a guaranteed level of retirement fund, but not a guaranteed level of retirement income. This would certainly be a step in the right direction.

But for my part, I feel that the putting trust back in pension outcomes may be a more significant key. So perhaps some level of flat-rate pension guarantee for all savers, however nominal, might be an improvement here? Funds over and above this minimum level could still be invested to achieve additional pension income as with current DC pensions. This would result in a sharing of the risk burden, but with a greater confidence in the success of retirement outcomes.

Interestingly, I have floated such an idea at an industry forum in the past, only to be met with a polite silence. I suspect that for many in the industry, such proposals fall somewhere between the two stools of ‘two difficult’ and ‘not in line with our current business plan’ .

To be fair, if the solutions were easy, someone would be doing it already. Yet I do believe that if the industry works together, a more robust solution to pension savings could be achieved.

So, let’s hope this ‘kick from above’ helps motivate all the stakeholders in this crucial debate.

In the meantime, it’s always worth reiterating that its generally better to save for retirement than not, particularly if you are lucky enough to be supported by a good company pension offering.

Best regards

Steve