On 22 November 2012, the DWP issued a paper aimed at "Reinvigorating workplace pensions". The paper sets out the Government's vision for ensuring that the pensions industry is meeting consumer needs and that the pensions challenges posed by an ageing population are tackled. In particular, it considers how to improve member outcomes from defined contribution (DC) schemes. It also provides several examples of what a "defined ambition" scheme might look like.
1. Improving the outcomes for members in DC schemes
The DWP proposals to improve the outcomes for members of DC schemes are:
- Increasing contribution levels - the DWP recognises that the statutory minimum level of contributions for auto-enrolment schemes will not provide the level of retirement income most people expect. Whilst it rules out increasing the statutory minimum "at this point", it leaves the option open for the future. However, the DWP raises the prospect of US-style "automatic escalation" schemes being introduced in the UK.
- Charges - charges can have a significant impact on the value of members' pension pots. The paper comments that it is monitoring the charges levied by schemes "very closely" and that it "will take prompt action if [it sees] evidence that charging structures are being used inappropriately or if charge levels are excessive".
- Investment strategies and returns - 80-90 percent of DC members are in their scheme's default fund. Therefore, the choice of default fund is a key factor in determining good member outcomes. The DWP comments that it will "continue to work with stakeholders to ensure that consumers are offered competitive and robust products". Further guidance from the ABI and others is imminent.
- Increased scale - the DWP is keen to examine whether a small number of large-scale pension schemes would offer better value for money for employees and employers than the current plethora of small schemes.
- Decumulation - many retirees fail to secure the best possible annuity rate. The DWP recognises that providing information and support to those making decisions about annuitisation is crucial to address this. The Open Market Option Review Group is currently looking at this issue. Depending upon the outcome of that work, the DWP will consider taking further steps. The DWP is also keen to explore alternative options at retirement to give people greater flexibility.
2. Defined ambition
The DWP paper starts to flesh out the concept of "defined ambition" for the first time. Possible defined ambition schemes include:
- a defined benefit (DB) scheme with conditional or optional indexation
- a DB scheme where a member's benefits are converted into a DC benefit when the member leaves, retires or dies
- a DB scheme that offers an element of fluctuating pension depending on the scheme funding
- a DC scheme with a money back guarantee funded by a levy on members' funds
- a DC scheme with certain investment guarantees, and
- a collective DC scheme.
The paper notes that further work will be needed for defined ambition to become a reality, not least the removal of certain legislative and regulatory restrictions.
3. Increasing trust and confidence
The DWP comments that lack of trust and confidence in financial products generally and a perception that pensions are too complex lead to a lack of engagement with pension saving. Automatic enrolment is designed to overcome this by harnessing inertia to encourage people to save. In addition, the DWP highlights the need for individuals to be given clear, understandable and useable information. It also reaffirms the commitment to addressing the issue of small pots so that people do not lose track of their pensions.
The biggest disappointment is that the paper suggests that the Government's red tape challenge - intended to reduce the regulatory burden on DB plans - will lead to little change, other than some simplification of the disclosure regime. Those wrestling with the intricacies of the debt on employer legislation, or section 67 on scheme amendments, may well disagree with the DWP's conclusion that "the legislation is largely fit for purpose".
This paper is sure to fuel the ongoing discussions that about how pensions can be improved to encourage retirement saving and to ensure better DC outcomes for members. It seems the introduction of automatic enrolment is just the start and with the prospect of more people than ever participating in a workplace pension scheme, the scrutiny on the quality and effectiveness of these schemes - whether occupational or contract based - is only going to increase. However, the success of Steve Webb's and the DWP's mission to reinvigorate workplace pensions will ultimately depend upon whether, when the talking stops, all of the discussions have led to sensible and concrete changes that employers and trustees feel able to support.