The UK’s workplace pensions market could be reinvigorated and the concept of ‘risk-sharing’ in pensions boosted if the Government were to prioritise adjusting key pieces of existing pension legislation as part of its Defined Ambition plans, says Mercer. The consultancy says that rather than attempting to create a new regime to stimulate the growth of, for example, Collective Defined Contribution schemes (CDCs), focus should be on revising current regulations to allow existing Defined Benefit (DB) and Defined Contribution (DC) schemes more flexibility.
Mercer’s views follow the company’s response to the Department of Work and Pensions’ (DWP) consultation ‘Reshaping Workplace Pensions for Future Generations’ which closed on 19 December 2013. The Government is seeking to provide greater flexibility for employers providing DB schemes, greater certainty for members of DC schemes, and is also soliciting view on whether standalone CDCs – similar to those that exist in the Netherlands – should be set up in the UK in an effort to promote risk-sharing.
According to Brian Henderson, Head of Mercer’s DC and Savings Team: “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.”
According to Mercer, the Government should prioritise the following areas:
• Abolish mandatory pension increases for benefits earned in future.
• Provide a statutory over-ride to allow employers to redesign their DB schemes for future accrual (whilst protecting existing benefits as far as necessary), for example, by taking out survivors’ benefits or increases in payment.
• Liberalise drawdown allowing members more leeway to take cash to use as they please, for example by abolishing or reducing the minimum income requirement. Similarly, allow long term care insurance and payments to be paid from drawdown without limit.
• Simplify auto-enrolment scheme requirements. A DB scheme should qualify if the contributions paid into it would pass the DC qualifying scheme test.
Glyn Bradley, Consultant at Mercer, says: “While CDCs seem an appealing ‘third way’ alternative to DB and DC, they will take a long time to set up. 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 can occur when they are least able to cope. It is worth noting that the perceived advantages of Collective DC schemes - the smoothing of returns, investment in higher risk assets for longer, no need to disinvest on retirement – are already available on the market, or could be fetched forth by tweaking existing legislation. The issue is more about trustees and sponsors stepping forward to adopt them.”
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