The Defined Ambition consultation ended on 19 December but the lobbying has continued. Camps have now formed around the various options.
Steve Webb, the Pensions Minister, and Alan Rubinstein, Chief Executive of the Pension Protection Fund, have been enthusiastic supporters of something called the pension income builder, which increases the guaranteed pension accrued each year with part of the annual contribution, with the remaining contributions invested in a collective defined contribution (DC) arrangement.
The Collective DC more generally, where returns are smoothed between members in an attempt to reduce the volatility of returns on individual DC, has also had some very vocal proponents. Considering it was originally ruled out as an option by the Department of Work and Pensions (DWP), has had 10 objections to it raised by the Association of British Insurers (ABI) and has been accused of not reducing risk so much as moving it around between members by Lord Hutton, this is a little bit of a surprise.
Lord Hutton, former Secretary of State for Work and Pensions and chair of the Commission on Public Service Pensions Commission, is dismissive of the whole defined ambition idea. Recently he said that the Government should stop “banging on” about defined ambition and let the pensions industry focus on applying defined benefit (DB) investment strategies to DC schemes. He is a particular fan of the Liability Driven Investment (LDI) approach, common in DB schemes protecting their funding position, being applied more consistently to DC. Hutton has recently joined Redington, an investment consultancy, so I imagine we can expect to hear a lot more from him on this subject.
Much has been made of the Dutch system, which has a “second pillar” of large industry-wide pension schemes. This has suffered from the same economic pressures which have dogged the UK system since the turn of the century, but has arguably retreated from straight final salary benefits – first to career average retirement earnings (CARE), then to risk sharing via variable contributions for employers balanced by variable benefits for employees, and currently renegotiating again in the wake of the 2008 crash – in a more orderly manner. I tend to feel that the main reason the Dutch system is better than ours is the same reason that their flood defence system is better: they put a lot more money into it. Nine times as much in the case of flood defences, and contributions into their second pillar average 20% of salary compared to the current average into DC schemes in the UK of under 8%. They also make you buy an annuity, make you join and don’t let you opt out. Despite this it remains remarkably popular with the public.
As you can see, there are a lot of acronyms flying around, and relatively little discussion with the people who these schemes are likely to end up getting foisted on. The Association of Consulting Actuaries (ACA) carried out a survey of smaller firms which revealed that what they wanted was:
- Members to receive more from their savings;
- Increased transparency and trust in the companies who provided pensions;
- No collective schemes; and
- More tax concessions.
This last point is unlikely to be conceded, with the Institute of Fiscal Studies joining the increasing clamour this week to limit the generous tax exemptions to employers and members with occupational pension arrangements.
But has anyone asked members of pension schemes? Very few, as far as I can see. The most notable being the Pension Regulator’s survey of DC pension members in 2012. When those still actively contributing to these schemes were asked which of a long list of things would encourage them to take more interest in their pension, the three things they wanted overwhelmingly most of all were:
- Someone making clear to them how much they needed to save;
- Being able to talk to someone to understand their pensions better; and
- Clear communication from their employer and their pension provider.
Notice how concerns about guaranteed benefits did not feature here. When asked, 85% had some understanding that their pension income was not guaranteed, and even more (94%) had an understanding that contribution levels were a key factor in determining that income. While 78% thought their company or personal pension would be one of their main sources of income in retirement (the next highest was the state pension with 22%), only 24% were confident that their current level of contributions was going to provide an adequate income. So they know they have a problem.
What they are asking for is a step change in financial education so that they can begin to tackle that problem. So could it be that all of the groups we have heard from above are trying to solve the wrong thing entirely?
As far as the regulatory environment is concerned, I think the document Defining Ambition produced by the National Association of Pension Funds (NAPF) before the consultation probably summarised the situation best. Joanne Segars stopped short of supporting any particular solution and instead laid out some of the main options and where they sat on the scale of risk (which I have reproduced above) to the member.
Segars suggested that we shouldn’t “sweat the small stuff”, and should instead concentrate on providing a flexible continuum of regulation to cover the whole scale of risk, otherwise any new approaches would be snuffed out by HMRC’s and TPR’s lack of flexibility and overly complex approach before they even got going, much as cash balance schemes have been over the last 20 years. I felt that this was just fence-sitting at the time, but have since realised that she was right. We have all been “banging on” for too long about things about which prospective members simply don’t care.
Assuming a relaxation of the regulations which doesn’t yet exist, we actuaries have piled enthusiastically into debating slight differences between our different pet schemes, standing toe to toe and swapping model results like punches, while seemingly forgetting all about the member.
Suddenly the most important contribution in Defining Ambitions seems clear to me: that of Morrisons’ HR Director about how they introduced a three year financial education and advice programme (called Save Your Dough) throughout their workforce ahead of their auto-enrolment date. They realised that they needed to help their employees understand their finances first before they would understand that they could make a difference to their long-term finances by saving into a pension. They involved Alvin Hall to add some celebrity glitter to the process, but also involved their main union USDAW. And they used a lot of different communication tools, from booklets to podcasts to online modellers to short films and video diaries in addition to the more traditional information sources and face to face sessions. They trusted that they had good people who would make reasonable decisions given sufficient accessible information.
I am sure there are other examples of such good practice out there, but we have not encouraged them with our endless debates about DC plus v CDC v DB minus and everything in between. The small stuff has been sweated quite enough. Let’s help firms talk to their members better instead.