The DWP should not be diverting resources to look at the possibility of defined ambition pensions – at least not yet.
The idea behind defined ambition pension schemes is simple enough. They are intended to build a bridge between defined contribution, where almost all the risk is carried by the members, and defined benefit, where almost all the risk is carried by the employer.
Effectively, defined ambition pension schemes should provide some sort of reasonable expectation that a certain level of benefit, or fund, will be available to the member at retirement, with the risks being shared between the employer and their workers. How exactly this will work in practice is currently being debated.
There is a danger, however, that a lot of time and money will be spent designing this keystone to the bridge between defined benefit and defined contribution, but no one will ever use it.
One problem in providing any scheme that gives a ‘guarantee’ of an amount of fund or benefit is the cost.
Someone invested in a fund that aims to provide an aspirationally defined fund or benefit will probably be paying more in charges than someone who is in an equivalent defined contribution arrangement.
In addition, in order to provide an aspirational benefit, the underlying investments would probably have to be ‘lower risk’. In other words, it could be argued that someone in a defined contribution fund will be paying lower charges, and likely to be enjoying better overall growth, than someone in a defined ambition scheme.
If good member outcomes are to be achieved, defined ambition may not be the answer.
It is also questionable whether employers will be interested in using a defined ambition solution for their workplace pension provision.
First of all, there has been, and continues to be, a move away from defined benefit schemes by private sector employers on the grounds of cost. These costs are at least partially a result of the risks and the associated liabilities that employers must bear.
If defined ambition also involves certain risks and liabilities, the costs of which must be borne by the sponsoring company, then it may not be welcomed with open arms by employers.
Secondly, many employers may well struggle to meet the costs of even the minimum requirements associated with automatic enrolment contributions and administration.
There are many employer duties associated with automatic enrolment and the penalties for not fulfilling these duties can be severe. Will employers be prepared to increase their potential risk, liabilities and costs by using a defined ambition arrangement as their automatic enrolment scheme?
What the DWP and the industry should be focusing on right now is helping employers with their automatic enrolment duties and helping individuals understand the value of saving in a pension.
There is no point in introducing a new option into the current market. Defined ambition may be a good idea; but it should wait until automatic enrolment has been bedded in.
At that point, extensive research should be used to establish if there is sufficient appetite among employers for defined ambition schemes. And thorough analysis should be carried out to determine if they will, in fact, provide good member outcomes.
Jamie Clark is business development manager at Scottish Life