The Government should exercise “extreme caution” when exploring options for gold-plated pensions, the Association of British Insurers (ABI) has warned.
As part of a package of consultations and calls for evidence issued following Chancellor Jeremy Hunt’s Mansion House speech, the Government sought views on how changes to the defined benefits (DB) pension market could encourage further investment in the UK economy.
DB pensions are often described as gold-plated because they promise pension savers a certain level of income when they retire, based on their salary.
They have increasingly been replaced by defined contribution (DC) pensions, where the pension saver bears the risk of how much money they will end up with in retirement, based on factors such as investment performance.
The ABI said it has stressed that the central purpose of DB pension schemes – to pay the benefits promised to members – should not be undermined.
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— Yvonne Braun, ABI
It said that only over the last five years has the conversation around DB pensions shifted from tackling deficits to dealing with surpluses.
Fluctuations in asset values could reverse this, so caution must be taken, the ABI said.
It added that 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 there could be a risk of creating commercial benefits for employers, while generating further risks for scheme members.
The ABI also said that proposals for the Pension Protection Fund (PPF) – a lifeboat scheme which protects people with a DB pension when a firm becomes insolvent – to act as a public consolidator of private DB pension schemes would be a major intervention.
Expanding the role of the PPF, or introducing a new public consolidator, could also risk introducing “moral hazard” into DB scheme decision-making, the ABI said.
Employers could feel inclined to put less money into their scheme to get cheaper protection from a public consolidator, it suggested.
Any expansion of the PPF’s role must retain the employer’s legal obligation to support the scheme and schemes would still need to continue to work towards being fully funded, the ABI said.
Yvonne Braun, director of policy, long-term savings, at the 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.”
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— Rob Yuille, ABI
The ABI said it strongly supports and encourages efforts to help people make the right choices when accessing their pension pots and throughout their retirement.
But it also said the Government has focused its attention on using collective defined contribution pension schemes (CDCs) – 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 and schemes should offer a range of options to enable people to achieve a sustainable income in retirement, the association said.
It also called for a re-think on proposals to help people keep track of small pension pots which are no longer being paid into.
The ABI wants the Department for Work and Pensions (DWP) to look at an option which would mean small pension pots follow people from job to job.
In July, Pensions Minister Laura Trott said: “I am proposing that eligible DC pension pots worth £1,000 or less will be consolidated into a handful of schemes.”
She said that a “central clearing house” would be needed to facilitate the policy.
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.”
A DWP spokesperson said: “As part of the Government’s drive to promote economic growth, DWP issued this call for evidence to build an evidence base around how DB pension schemes could use their assets more flexibly, while maintaining security of the benefits promised.
“The responses to this call for evidence and other stakeholder engagement will inform the Government’s understanding of these issues and will help inform the development of future policies in these areas.”
