To see this article in digital magazine format, click here.
First there was defined benefit, which workers loved; then there was defined contribution, which employers loved; now the government in the United Kingdom is heralding the arrival of the defined aspiration pension, which doesn’t look like it will be loved by anybody.
The idea, mooted by Minister for Pensions Steve Webb, is a noble one: to try and stop workers with little pension savings hurtling toward an impoverished retirement.
But what are the options and why has no one thought of them before? Well, people have, at least in some form. Hybrid pensions, which amply function elsewhere in the world, are outlawed in the UK. The idea is that staff get a guaranteed defined benefit chunk to a certain level and it is topped up by a defined contribution portion. The Association of Consulting Actuaries (ACA) was pushing government to give them the green light before the financial crisis hit. Back then, there were still a couple of major corporate benefit funds open to new members in the UK, but as aiCIO revealed at the start of January, the last FTSE100 company doing so—oil giant Shell—ended the era by closing its fund.
We are now at the stage where employers have given up taking on risk (in terms of pension provision), and Webb is tasked with turning this around. He has suggested a couple of ideas that are in the design stage, but even from ground zero they look a touch one-sided, and not in favour of the staff they are intended to help.
One idea was to offer a guaranteed lump sum and then letting the retiring staff members fend for themselves in the annuity market. Another idea was giving young people a “ball park” pension promise that alters as they get older—a very handy loophole should there be another financial crisis. The announcement caused much debate last month, and although most welcomed any movement to tackle the problem at all, Webb did not find too many cheering.
Malcolm McLean, Consultant at Barnett Waddingham, said he feared the move had come too late. “Many employers who have had a bad experience with their final salary schemes will now be reluctant to offer any sort of guarantees on pension entitlements be they limited to a cash balance scheme or something more extensive.” The ACA, for their part, welcomed Webb’s announcement and said that their annual survey showed employers wanted to, or at least accepted that they should, take on investment risk on their employees’ behalf. However, the cost of legal, actuarial, accounting, and any other advice and management fee made it impossible. This is also a handy (and understandable) loophole:
If your business is still alive after the financial crisis, why potentially poison it with
pension risk?
Webb’s stance is admirable, but he has a tough goal to reach—and one few think he will achieve. —Elizabeth Pfeuti