Yesterday, the Department for Work and Pensions (DWP) published the Government Response to the Consultation “Reshaping workplace pensions for future generations”. To see the full document follow this link: Reshaping Workplace Pensions
The Consultation focuses on whether an alternative to the existing pension structures commonly used by employers in the UK today is possible or desirable. Or, in lay terms, is there a middle ground between Defined Benefit (DB) pension schemes and Defined Contribution (DC) schemes?*
Now this is not a new topic. Steve Webb, The Minister for Pensions, has been openly speaking about an alternative, known as Defined Ambition (DA), for some years, and the subject has featured on this blog in the past. It’s also the case that some limited versions of DA schemes have already been set up in the UK.
Yet this is clearly not far enough for either the DWP or Minister.
The document issued yesterday states;
“There is a clear appetite from providers, employers and savers for new types of pensions that provide greater certainty, with a more equitable share of the risk”
And the document goes on to make it clear that a new legislative “DA pension space” should (and presumably will) be provided for employers and the pension industry to utilise in the near future.
Quite what the resultant pension schemes may look like is still anybody’s guess, and something we will comment on when we know more. Yet my concern is more fundamental; is there really such a demand for this type of scheme?
I can’t help thinking that the Consultation responses have been overtaken by events – and indeed I would genuinely question the continued validity of the responses published yesterday. Why? Well here are three good reasons:
1) The Consultation only ran for just over a month last year. This is surely too limited a time to gauge an accurate response from all the stakeholders, and particularly the industry who will have to be instrumental in making this work.
2) The Consultation was completely overshadowed by another DWP Consultation running through a similar time period – the much more immediately important Better Workplace Pensions Consultation (the one that sought to impose new minimum standards on Auto-Enrolment Pension schemes). As such, the DA consultation received much less attention from commentators (including myself) than it would usually merit.
And most importantly,
3) All of the Consultation responses were received before George Osborne’s surprise “Freedom of Pensions” announcements in the Budget.
Item (3) changes the entire pension’s landscape at a stroke. If the Consultation were run again today, it’s possible (perhaps even probable) that the outcomes and “clear appetite” might be less evident than this document leads us to suppose.
The DWP do however make a brief mention of The Budget implications. The Consultation suggests that:
“the proposals under the Budget announcement in relation to decumulation** are likely to have a beneficial effect on DA models”
It remains to be seen if this is indeed the case. However, I suspect that the lure of complete access to pension funds from age 55, and the simplicity of existing DC schemes, will still appeal to many employees and employers alike. Given this, the DA band-waggon may take rather a long time to get going in the UK.
Yet, despite my evident doubts as to the validity of the Consultation response, there is perhaps one silver lining here. It is clear that both the Freedom of Pensions and Defined Ambition proposals have the potential to create some real innovation in the pension space – something which legislation has previously made rather difficult.
We will watch this one with interest.
*DB schemes provide guaranteed levels of pension income for their members, DC schemes provide no such assurance. DB schemes are often more expensive to deliver for employers as the Guarantees have to be provided by the scheme/employer.
**how pension funds are extracted to provide retirement income for the individual saver