Government’s Reinvigorating Workplace Pensions proposal, which aims to rebuild confidence in workplace pensions and bridge the divide between defined benefit (DB) and defined contribution (DC) pension schemes, by introducing defined ambition schemes, has been broadly welcomed.
According to the consultancy, risk-sharing between employer and employee and pushing for higher saving are admirable goals, but their success will rely upon ensuring that people saving for retirement understand the way risk and cost is balanced between themselves, their employer and the government, and making sure that future governments refrain from moving the goalposts. Looking at the practicalities of building a workable compromise between DB and DC, Glyn Bradley, Actuary in Mercer’s Retirement, Risk and Finance business warns, “Striking a balance has to be at the heart of designing new schemes. If risk sharing is to work the Government needs to focus on the kind of schemes which employers really want to offer to employees and the products which insurers are actually prepared to offer to savers. Equally, we need simple products that savers feel they can understand. It’s futile legislating for savings vehicles that no-one will actually offer, or, pay into.”
Mr Bradley added, “The nature of the pension promise should not be at the heart of the debate. We could argue for defined benefit, defined contribution or defined ambition until the cows come home, but all this is secondary to how much money is actually put in the pension pot.” “The number one reason why many members of DC schemes may end up with low pensions is that little money is being put into them in the first place, relative to members’ retirement objectives. Unless this fundamental point is recognised, then no matter how a scheme is designed, it will not provide for the pension which workers, their employers or the Government are striving for. Whilst the intention behind guarantees and insurance is to protect returns, these options inevitably come with a price tag, for either the member or their employer and may simply guarantee low pay outs.”
Dina McDonald, Principal in Mercer’s Retirement, Risk and Finance business warned, “Risk-sharing between employer and employee is, on the face of it, an attractive proposition but employers are likely to be wary. Many of today’s private sector final salary schemes started off as ‘defined ambition’ packages, with targets, aspirations and safety valves, but few guarantees. But the ‘ambition’ element has fizzled out over the last 25 years as policy has been shaped and reshaped by successive governments, increasingly providing more certainty to members and leaving employers to pick up the tab. As a result, companies have increasingly sought to pass on all of the risk to employees, leaving the legacy of a very polarised pensions landscape. The success of any new ‘defined ambition’ schemes will depend upon future UK governments protecting the middle ground between DB and DC.”
