The government should adopt a ‘keep it simple’ approach to private pensions and focus on basic incentives for employers to run simple, transparent pension schemes.
That’s the message from Mercer Human Resource Consulting in its initial response to the government’s consultation on proposals to change the regulatory framework for occupational pensions.
The consultation explores the scope for possible deregulation and simplification of private pensions.
Proposals include adjusting the regulatory framework to facilitate the creation of risk-sharing schemes to halt the shift from defined benefit (DB) to pure defined contribution (DC) arrangements, and giving employers more flexibility to manage their pension liabilities.
Although sponsored by government, Mercer says it is unclear whether either the consultation authors or ministers are committed to action. Experience suggests that, where large sums of money accumulate without clarity of ownership, governance problems are inevitable.
Tim Keogh, worldwide partner at Mercer, said: “We are sceptical about whether there is real political appetite for wholesale change in pension regulation.
“Even if there was, most employers would be cautious about new-found freedoms given the lessons of the past. Flexibility means fudge, and fudge means losers are well as winners.”
He added: “Employers looking to the long-term will rightly fear re-regulation when the ‘flexible regime’ is seen to let some scheme members down, as it inevitably would.”
Under the proposals, requirements for limited price indexation and revaluation could be relaxed, with safeguards where appropriate.
Mr Keogh said: “A level playing field on indexation is desirable for risk-sharing schemes to operate under the existing legislation.
“However, schemes based on discretionary or no indexation have serious potential to disappoint members. Even with inflation at 2 per cent, a fixed pension loses a third of its purchasing power after 20 years. This matters as more people expect to live well into their 80s.”
Mercer believes the review ties issues around new scheme designs, such as risk-sharing and indexation, to legacy issues like the management of future surpluses in closed DB schemes. Some of these technical legacy issues are more easily solved.
Mr Keogh continued: “Giving employers the right to future surpluses to match their obligations in relation to future deficits is a good example of a worthwhile technical improvement.”
He concluded: “The number one goal for government has to be to maintain an attractive tax and regulatory framework to allow employers to run simple, transparent pension schemes for their employees. These are likely to be DC or near-DC.
“More complicated arrangements will inevitably require more complex regulation, and it is far from clear that radical de-regulation for these schemes is either feasible or desirable. All too often we have seen ideas for pensions simplification turn into added complexity by failing to recognise this. To be effective, this review should be kept simple.”
