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Is Steve Webb pissing in the wind on ‘defined ambition’?

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Following the Government’s announcement of plans to encourage employers to offer ‘defined ambition’ pensions to their staff, Money Marketing deputy head of news Tom Selby asks whether defined benefit pensions can be saved from extinction.

“I’ve been pissing in the wind

I chanced a foolish grin

And dribbled on my chin

Now the ground shifts beneath my feet”

Badly Drawn Boy

Pensions is one of the few subjects where an identical story can generate two diametrically opposed headlines.

Take today’s front pages of The Daily Telegraph and The Daily Express, both reporting on Steve Webb’s ‘defined ambition’ proposals.

The Telegraph went for ‘Pensions face new blow from ministers’, while The Express ran with ‘Bigger better pensions for all: Industry shake-up will give boost to millions’.

So what exactly is the Government trying to achieve here? And will it work?

The thinking behind the DA project is straightforward – salary-linked pension schemes are in terminal decline in the private sector, with many employers scarred by multi-billion pound deficits because they massively underestimated how long their members would live.

But defined benefit is not dead. According to Government statistics, there were still over 1.5 million active members of DB schemes in 2012 – although around two-thirds of these schemes had already closed to new members.

This suggests there are employers out there who, despite regulatory and balance sheet pressures, still want to offer their workers a good quality salary-based pension.

Pensions minister Steve Webb’s fear is that, unless something is done to help these firms manage their DB costs, they will have no option but to shove all their members into a defined contribution scheme.

The DWP says: “A clear message from our discussions with employers is that, unless options to reduce cost volatility are introduced, the case for maintaining DB schemes will continue to weaken and they would have to consider moving away from DB completely.”

The core elements of Webb’s ‘DB lite’ proposal are the removal of compulsory index linking of pensions in payment and scrapping the requirement for employers to continue paying a pension to a DB member’s spouse if the member dies.

In addition, the Government is considering giving DB sponsors flexibility to increase members’ retirement ages in in line with rising longevity, although it doesn’t specify how much notice members would need to be given.

Finally, the Government could allow schemes to automatically convert a member’s DB pension pot into a DC fund when they leave, removing the sponsor’s longevity risk exposure.

The rule changes will be limited to future accruals and available to existing DB schemes, leading some to suggest DB members will suffer as a result.

Hargreaves Lansdown head of corporate research Laith Khalaf says: “Under this new proposal workers could save diligently throughout their lifetime, only for the rug to be pulled out from under them at the last minute. 

“The Government is trying to manage the decline of final salary pensions, but flexible defined benefit schemes will be complicated, costly and will create huge uncertainty for pension savers about what pension income they can expect.”

But this argument ignores the central problem facing Government – namely, that these workers are destined for even greater uncertainty if their employer opts for a DC scheme instead.

It makes little sense to hamper employers who want to do right by their workers with rules that force them to take on social welfare responsibilities beyond their means.

Independent pensions expert Ros Altmann says: “By requiring final salary schemes to always provide partners’ pensions, inflation linking and revaluation of leavers’ benefits, employers were asked to assume a role that normally only the state would fulfil.”

Nobody is saying defined ambition will result in a resurgence of DB to the level of provision enjoyed 20 years ago – it won’t. And it remains unclear how the private sector will respond to the Government’s proposals for collective DC and investment guarantees.

But DB is still the gold standard of pension provision and if employers want to offer this – albeit without the traditional bells and whistles – the Government should support them.

Tom Selby is deputy head of news at Money Marketing

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Ros Altmann says: “By requiring final salary schemes to always provide partners’ pensions, inflation linking and revaluation of leavers’ benefits, employers were asked to assume a role that normally only the state would fulfil.”

    Can someone please tell me why AE is any different? This is not a task for private employers – or indeed pension providers (although they are currently slobbering at the chimera of this lifebelt to their flagging business.

    Indeed one wonders if it is even a job for advisers (unless they are registered charities). If an adviser really wants to help an SME and show some cost effectiveness they will be detailing how the firm can navigate through this mess and avoid AE all together. (There ARE ways! The smaller the firm the easier it will be)

  2. I retract yesterday’s comment about this proposed idea, as my previous criticisms related to the mistaken impression that this proposal would affect benefits that have ALREADY been accrued.
    However, I think that most employers will now run a mile from anything resembling defined benefit schemes as a means of their employees building up future pension benefits. Frankly the very term defined “ambition” gives things away slightly, if you take away the provision of a widows pension and indexation in payment then its not a particularly attractive option for a married man or woman who intends to live a long time. Why not just admit that any form of guarantee comes at too high a price and instead have defined contribution schemes where employers who want to do the right thing make meaningful employer contributions way above the Auto Enrolment minimums? Guarantees cost too much money for those who do not want them. When you look at the demise of with profit funds and the cost of third way income guarantees it is clear that guarantees come at the expense of investment flexibility and can seriously limit growth potential.

  3. Is Defined Ambition really about private sector final salary schemes, or is the true goal to find a way to reduce the cost of public sector schemes in a way that the Unions may find very slightly more acceptable?

    Many private sector schemes are on a journey to DC (of some description), so DA may be too little, too late for them. Let’s see.

  4. There are, of course DB schemes out there now through AXA, Aegon and MetLife. Giving a guarantee of what you are going to get in the future. This is a rapidly expanding market, proving there is an appetite for certainty.

  5. Abacus test comment 15:56

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