Changing the UKs current workplace pensions legislation could provide the flexibility and risk-sharing sought by the government in its defined ambition plans, Mercer has claimed.
The Department for Works and Pension wants to develop a defined ambition model, which would combine the best features of defined benefit and defined contribution. In a consultation issued last year it set out three possible ways forward: flexible DB; risk sharing and risk pooling; or collective defined contribution (CDC) and ministers have subsequently indicated that CDC is their preferred model.
But Mercer said today that the government should focus on revising current regulations to allow existing DB and DC schemes more flexibility rather than creating a new regime to stimulate growth of CDC.
'While CDCs seem an appealing "third way" alternative to DB and DC, they will take a long time to be set up,' said Glyn Bradley, consultant at Mercer.
'We believe that a more sensible priority would be to give existing DB schemes more flexibility by addressing some of the current restrictions. CDCs are very successful when market conditions and membership are favourable but overseas experience demonstrates that difficult funding problems occur when they are least able to cope.'
He noted that the 'perceived advantages' of CDC - the smooth running of returns, investment in higher risk assets for longer, no need to disinvest on retirement - are already available on the market, or could be obtained by tweaking existing legislation.
'The issue is more about trustees and sponsors stepping forward to adopt them,' Bradley said.
According to Mercer, the government should prioritise: abolishing mandatory pension increases for benefits earned in future; providing a statutory over-ride to allow employers to redesign their DB schemes for future accrual, for example, by taking out survivors' benefits; liberalising drawdown to allow members to take cash to use as they please or use it for long-term care payments.
Brian Henderson, head of Mercer's DC and savings team, said: 'Undoubtedly, we need to maintain the faith in, and the sustainability of, our retirement system, plus we need to help more people save for their retirement. This is about providing pensions that employers are prepared to support and that people value. However, we do need to be mindful of the consequences of placing all the financial risk on either an employer's balance sheet or an employee's old age, so spreading the risks of future pension provision may have some appeal.
'Nevertheless, in DC we must face the fact that guarantees come at a cost, reflecting the experience of DB providers. Essentially, a good pension is far more about how much more money can be saved and where that money gets invested rather than simply providing expensive guarantees or risk sharing.'
