The title of the Government’s paper ‘Reinvigorating workplace pensions’ made me wonder what golden age we are trying to return to when pensions were dynamic and exciting.
The only time I can remember a real public buzz around workplace pensions was in the late 1980s when contracting-out offered ‘free’ money from the Government into our pensions and we could break the shackles of our employers’ schemes to transfer to personal pensions.
I suspect that is not what is intended, though some of the rhetoric would fit. For example, the information principles include “Give people control – they must know they have a choice” and “Focus on the benefits to individuals, not on their responsibilities”.
I say this not to rubbish the paper or to suggest a major scandal brewing, but because I think the real objective is not to reinvigorate pensions, beyond the obvious aim of encouraging more saving. Rather it is about returning to a world where people are confident that their employer’s pension will deliver a good retirement income, without excessive charges or savings that go through the floor when markets crash. It is about building confidence, increasing trust and meeting expectations, not about making pensions seem vigorous and sexy.
So we are told that there is no need to cut red tape, particularly because automatic enrolment requires legislative stability.
Action is threatened within months if charges are deemed too high. And the paper discusses how we can restore the benefits associated with defined benefit pensions without over-burdening employers.
Incidentally, such a focus on the virtues of DB schemes always ignores the fact that they depended on you staying with a generous employer for most of your career. Pension benefits were highly polarised, and the new world will at least ensure that many more have basic retirement provision.
The core of the paper is defined ambition, whether DB- or DC+. The aim is to share risk, rather than leaving it all with the employer or putting it all on the individual.
Pension providers can share in the risk (after all, many of us are still insurance companies) but in current market conditions the cost will appear high. That does not sit easily in a world where charges are pared to the bone.
I have always felt that, outside the employers with the scale and resources to run DB-, most people are looking for a return to something very like with-profits.
However, there is no realistic prospect of with-profits returning in anything like the form of 25 years ago. Collective DC offers some similar features, but I worry about pensions subsidised by borrowing from future generations rather than from surpluses built up in the past.
Failing that, I wonder whether part of the solution could be for employers to buy basic guarantees – perhaps no more than money back – through an extra premium paid when they pass on their and their employees’ contributions. The cost to them would be relatively modest, and for their staff it would be a benefit, not a cost.
I am sure that others will produce much more innovative and inspiring models. A great deal of good work has been done, and this paper could help fit the final piece into the jigsaw.
If so, perhaps this Government initiative really will refresh the parts that other reforms could not reach.
Ian Naismith is head of pensions market development at Scottish Widows