Editorial: Defined benefit pensions are incredibly complicated.
Not only are they difficult for members to understand, they are also complicated for schemes to administer.
That is why the Association of Consulting Actuaries and Royal London have suggested the creation of a ‘pensions pound’, into which all the complexity of a saver’s current pension rights could be converted.
They argued that these pensions pounds could then be converted back into a set of standardised DB rights, which could be common across all pension schemes.
So, what would be the advantages of ensuring people’s pension rights are structured in this way? The ACA and Royal London said the cost of running a scheme could be reduced by up to 50 per cent.
They also said it could improve governance, reduce errors and pave the way for significant DB consolidation – enabling consolidators to operate more efficiently and freeing up employer time to concentrate on day-to-day business, rather than the task of running a pension fund.
And importantly, radical simplification could improve member understanding of savings.
The ACA and Royal London argued that the provision of a simple benefit structure could mean that the benefits provided will have the same pensions pound value across different schemes, based on a standard set out in legislation.
With the transition from employer-sponsored pension provision to individual-led saving through defined contribution plans, they said it is crucial that savers can understand how many pensions pounds they have, and how best to use them and top them up if necessary.
Some experts were not so sure about the proposals. Irwin Mitchell’s Penny Cogher said they “are just too sophisticated and involve too much actuarial magic and sleights of hand”.
Legislation currently allows for some pension benefit reshaping, but further legislation would be required to ensure members were treated fairly if their benefits were reshaped.
However, the likelihood of the government taking this on board any time soon is slim, due to other priorities.
Sophia Imeson is associate editor at Pensions Expert. You can follow her on Twitter @SophiaImeson and the team @pensions_expert.
