When we talk about pensions we often think about the industry or the market as a whole. Take defined benefit pensions: there is £1.5 trillion under the management of these schemes, a sum equivalent to around three quarters of the annual GDP of the UK. With such vast amounts of money tied up in the schemes it is vital for the UK economy that their future is secure.
But behind these giant figures are the individual retirement incomes of 11 million people. Some will be a long way from retirement, others already well into it and they will have come from all sorts of different backgrounds. During their working lives they might have been an executive at a large financial services firm, worked as a tradesman, or on a factory floor, and the amount of income they receive from their scheme will vary.
But the one thing they have in common is they have worked hard and paid into their pensions and, I believe, have the right to feel secure in their retirement. They need to know that their future is secure and have confidence in the system.
Over the past year, high profile cases like BHS have dented consumer confidence in defined benefit pensions. Ordinary people are concerned about the security of their retirement income and what will happen to them should their scheme fail. Headlines in summer highlighting record levels of pension deficit and suggesting that many schemes will struggle to pay out have left many consumers wondering what the future may hold for their retirement.
Whilst these concerns are understandable, the current system is far from broken. We have in place a strong regulatory framework and a regulator that has a range of powers to intervene where it has concerns. If anything its recent activity in relation BHS has shown its willingness and ability to use these powers.
And should the worst happen we also have in place a strong and robust Pension Protection Fund which provides a lifeboat fund to pay compensation to scheme members if an employer fails.
Green paper, fresh ideas
As Money Marketing readers will know, last month we launched a green paper to open a discussion on a number of areas where changes could be made to improve the security of pension savings or to boost the efficiency of the current system.
Attention has rightly been given to the some of the questions around indexation and superfunds in the consultation, but its scope is much broader and consumer confidence and protection is a big consideration within it.
For example we have included suggestions for increasing the powers of the regulator to enable it to intervene earlier, to streamline the way it carries out its investigations and to promote a more effective flow of information between trustees and sponsoring employers.
Some of these suggestions raise quite fundamental questions about what we want from a regulator and what changes could be made to strike the right balance between safeguarding pensions without placing unworkable demands on employers. Careful consideration is needed, but we are open to strengthening the role and nature of the regulator if there is compelling evidence to do so.
Our demands of the regulator must also take account of that fact that it has a very wide remit across all scheme types as well as a key role in ensuring auto-enrolment is a success. It is clear that they can’t be in all places at all times and we need to ensure that any additional expectations are fair and deliverable.
“We are open to strengthening the role and nature of the regulator if there is compelling evidence to do so.”
Of course, to restore consumer confidence we need help from experts and the industry which is why we are consulting rather than jumping straight into legislation. Before the consultation closes I want to hear from the industry on what more can be done to strengthen the powers of the regulator and help us safeguard confidence. The industry knows that it needs happy, confident customers and as always I welcome your views.
Richard Harrington is the pensions minister.
The green paper will be open for another four weeks and more information can be found at https://getinvolved.dwp.gov.uk/pensions/db-pensions-green-paper/