The coalition government plans to launch a consultation later this year in a bid to find a “third option” between expensive final salary pensions and far less generous defined contribution workplace schemes.
According to the
Daily Telegraph,
Pensions Minister Steve Webb said at a dinner last night that, as more and more final salary pension schemes were withdrawn, there was a need for “a frank and open debate about how to get companies to continue to offer good quality pensions”.
The statement follows the news last week that 200 firms, including
Shell,
Unilever and
Alliance Boots, closed their final salary schemes last year because they believed that they were too expensive and bureaucratic to run as they are subject to strict funding rules.
The move will affect 400,000 workers and mean that employers are no longer legally responsible for guaranteeing their retirement incomes at promised levels.
Under cheaper and increasingly common defined contribution schemes, it is the employees themselves who are accountable for the state of their retirement funds, which are subject to fluctuations in the stock market where the money is invested.
But Webb said that the aim of his proposed consultation was to ensure pensions were “reinvigorated” by finding a middle ground between the two existing approaches.
He called his middle ground scheme a “defined aspiration”, which would offer a “measure of security” to staff, but also have a degree of flexibility so that external factors such as stock market crashes would not leave employers with pensions obligations that they found “impossible” to pay out.
A toxic system
“Could we move away from the strict divide between defined benefit and defined contribution? Is there a third option, which would ensure that individuals are not left to shoulder the entire risk of their pension saving, and employers can offer pensions within a lighter touch regulatory regime?” Webb asked.
Mark Hyde Henderson, chairman of the
National Association of Pension Funds, welcomed the proposals. “Many people in the pensions industry have waited far too long to hear such a commitment from government,” he said.
In news elsewhere, a joint report by NAPF and the
Cass Business School claimed that private sector workers are taking a £1 billion hit on their pension incomes every year as a result of a "hugely unfair and opaque" annuity system. As a result, it calls for fundamental reform of the way people shop around for a retirement income.
Proposals include building a shopping-around process into all pension schemes, increasing the transparency of annuity pricing and commission structures as well as improving government scrutiny of the annuity market.
NAPF’s chief executive Joanne Segars warned that the sector desperately needed to be "straightened out". "People are saving throughout their working lives, only to end up short-changed by a toxic system. Every year, £1 billion that could have been paid out in pensions instead disappears down the plughole of a murky annuity market," she said.
The government and industry needed to work harder to create a "clearer, fairer system that delivers value for money", Segars added.
David Blake, director of the Cass Business School, meanwhile, described the report as a "wake-up call". "If the annuity system is not overhauled, employees in defined contribution schemes in the private sector will continue to suffer massive detriment and the government’s new auto-enrolment regime will fail the very people it aims to help secure financial independence in retirement," he said.
