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04

Mixed response to 'defined ambition' plans

Open-access content Tuesday 10th April 2012 — updated 5.13pm, Wednesday 29th April 2020

The Association of Consulting Actuaries has said it is ‘encouraged’ by government support for defined ambition pensions.

2

ACA chairman Stuart Southall welcomed calls made by pensions minister Steve Webb yesterday for an approach which more evenly shares the risks and uncertainties in pension schemes between employers and employees.

'We are encouraged that at last the Government has seen the need to take action to encourage more employers to provide workplace pensions that offer employees a more certain pension than many now can expect,' he said.

'What the Minister has termed "defined ambition" schemes also offer employers the ability to control the cost of their pension package in a way they cannot at present with most defined benefit pensions.'

Mr Southall said ACA research had shown a continued appetite among employers to provide pensions that do not take all the risks on employees.

But he said the 'regulatory hurdles and fiscal uncertainties' pushing employers towards defined contribution schemes meant they were unlikely to respond to the call without a 'step change' in legislation and regulation.

'We believe the Government will have to take some meaningful steps to stimulate the defined ambition range of schemes; a task which has become significantly harder since the Association first identified this as a sensible "middle way". 

'Employers will in particular need the strongest of reassurances that future Governments will not be able to change the rules or fiscal treatment of such schemes so costs and commitments are added to by UK or EU diktat in the way they have been over the last 20 years. This won't be easy. 

He added: 'The ability of employers to amend pension ages in a timely way to mirror the flexibility that HM Government appears to have to do this is another step that will be needed to make certain types of defined ambition and remaining defined benefit schemes work.'

Barnett Waddingham consultant Malcolm McLean said that, while the move to offer a risk-sharing alternative to DB and DC schemes was a positive step, the government had been too slow to act.

'I fear...that the government has come to this rather late in the day, ironically at the very point where millions of workers are about to be auto-enrolled into largely bog-standard defined contribution schemes,' he said.

'Many employers who have had a bad experience with their final salary schemes will now be reluctant to offer any sort of guarantees on pension entitlements be they limited to a cash balance scheme or something more extensive.

'That said, the industry should be prepared to work with the government to see what options exist and what can be achieved in this important respect.'

Tom McPhail, head of pensions research at Hargreaves Lansdown said that, while Mr Webb was addressing the 'right issue', he was 'asking the wrong question'.

'Structural tinkering of the kind currently being promoted by Steve won't fix the retirement shortfall,' he said. 'Rather than promoting 'Defined Ambition' or claiming that lower charges will fix the problem, policymakers should focus on the more challenging but much more important message: If you don't pay enough in, you won't get enough out.'

'Appropriate contribution levels and duration of membership and good investment returns will all deliver good pensions, whatever the benefit structure. The problem for policymakers is that in order to make this happen, they need to tell voters the uncomfortable message that they need to spend less and save more; a lot more.

'It is hardly surprising that some politicians, trade bodies and commentators choose the easy way out and try to pretend that it is possible to deliver a good solution without a significant hike in pension contribution rates.

He added: 'Within the DC pensions sector we have all the necessary tools to deliver good member outcomes. Public policy focus should be directed towards improved member engagement and decision making, rather than announcing a makeover for the Emperor's new clothes.'

This article appeared in our April 2012 issue of The Actuary .
Click here to view this issue

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