As part of the package of consultations and calls for evidence issued following the Chancellor’s Mansion House speech, the Government sought views on how changes to the DB market could encourage further investment in the UK economy.
At the core of our response, we have stressed that the central purpose of DB pension schemes - to pay the benefits promised to members - should not be undermined.
Only over the last five years has the conversation around DB pensions shifted from tackling deficits to dealing with surpluses. If we see fluctuations in asset values, this could reverse again, so caution must be taken.
Any move to allow employers to use the surplus of a DB pension scheme should only be considered if member benefits have already been secured. Otherwise, this risks creating commercial benefits for employers, while generating further risks for scheme members. This is precisely what the regulatory system over the last twenty years has been created to prevent.
Consolidation of defined benefit pension schemes
As the Chancellor highlighted in his Mansion House speech, evolution, not revolution, must be central to any changes to the UK pensions ecosystem. The DB pensions ecosystem is already evolving as more schemes are heading to buy-out with an insurer.
This market is thriving: by 2030, half of all DB pension scheme liabilities will have been insured, covering 5 million members’ benefits and close to £1 trillion in liabilities. The insurer buy-out market caters to schemes of all sizes, with the largest deal announced this year at £6.5 billion, and a transaction with just £600,000 of liabilities.
The Government’s proposals for the Pension Protection Fund (PPF) to act as a public consolidator of private DB pension schemes would be a major intervention in the insurance buy-out market, which is well-regulated, well-functioning, and showing no evidence of market failure.
Expanding the role of the PPF, or introducing a new public consolidator, could also risk introducing moral hazard into DB scheme decision making. Employers could feel inclined to put less money into their scheme to get cheaper protection from a public consolidator, rather than seeking full protection for their scheme members via an insurer buy-out.
It is also unclear who would pick up the bill were the PPF obliged to pay full benefits to members where schemes fall into deficit, in particular whether Government would have the appetite to take on this liability.
Any expansion of the PPF’s role must retain the employer’s legal obligation to support the scheme, full benefits would still need to be paid, and schemes would still need to continue to work towards being fully funded.
Yvonne Braun.jpgYvonne Braun, Director of Policy, Long-Term Savings, ABI said: “We welcome the focus on addressing some of the ongoing challenges in pension policy and are keen to work with Government to tackle these. However, it should exercise extreme caution when exploring options for DB schemes, including the ability to extract surplus, and introducing a public consolidator. Introducing these market-shifting proposals may bring significant risks for highly uncertain rewards.
“Changes must not be rushed. Proposals must be thoroughly considered, for the long-term, and ensure that savers’ needs are at the heart of all pensions policy decisions.”
Options for savers
The Mansion House Reforms rightly champion that savers need to be at the heart of proposals. In particular, we welcome the Value for Money framework which should help end the “cost is king” culture in defined contribution (DC) pensions. And we strongly support and encourage efforts to help people make the right choices when accessing their pension pots and throughout their retirement.
By requiring schemes to put support in place for their members when making decisions about their retirement, DWP’s proposals set the right direction for the future of DC pension income. However, the Government has focused its attention on using Collective Defined Contribution schemes – which pool member and employer contributions. While there could be a place for CDCs in the market, they are not going to work for everyone when considering their health, risk aversion and preferences. Instead, the Government needs to ensure that schemes offer a range of options to enable people to achieve a sustainable income in retirement.
CDCs are very complicated products with risks that are difficult for an individual to assess, and DWP needs to ensure consumers understand that the level of their pension benefits is not guaranteed. Ultimately, a change to the advice rules would be needed that allows providers and schemes to better support consumers with their retirement decisions.
Rethink proposals for small pension pots
To solve the issue of the growing number of small, inactive pension pots, DWP has proposed using a multiple default consolidator model. The mechanism proposed for introducing this model is a flawed solution, and we urge the DWP to revisit the pot follows member option, which would mean that small pension pots automatically follow an employee from job to job. That solution would build on the success of automatic enrolment, and as it is based on the employment relationship, it would be clear to the saver why the pot is being transferred – unlike in the multiple default consolidator model.
DWP’s proposal sets out a high-level idea of establishing a new market for small pot pension consolidators, where savers would have to proactively choose a consolidator for their pot or have one allocated to them by a central clearing house. There are many challenges and missing pieces to this, but the complexity involved in establishing and running it is our primary concern.
In addition, the model would neither complement, nor build on, the pensions dashboards system. Instead, it would require a new, large-scale IT project. This would create a huge distraction at a time where the pensions dashboards project already had to be re-set.
Additionally, as a central clearing house would need to be set up to act as a third-party to support and enable the transfer of small pots between consolidators, it would add considerable cost to savers. The consultation also proposes a central database, which presents security and data protection concerns, and which was rejected as a solution for pensions dashboards.
Rob Yuille, Assistant Director, Head of Long-Term Savings Policy, ABI, said: “Tackling the challenge of the rapidly growing number of small, inactive pension pots is important so that it is easier for people to keep track of their money and to make the workplace pensions market more efficient.
“As it stands, the proposed solution isn’t workable. We’d encourage DWP to press pause on developing this policy until the numerous challenges can be tackled.
“An alternative exists in form of the pot follows member approach, which already has primary legislation on the books. DWP should revisit this option and look at how to implement it once pensions dashboards have been launched successfully. Pensions dashboards will bring key improvements in data quality which could help to make more efficient, cheaper pension transfers a universal reality.”
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