Pensions minister Steve Webb told an industry event this week the “pendulum is going to swing back” from individual defined contribution pension provision, but delegates challenged the viability of risk-sharing schemes.
Industry figures and government projections predict the reforms announced in this year’s Budget will accelerate the long-running shift from private sector defined benefit to DC, despite the pensions bill enabling the creation of middle-way schemes that share risk.
Webb made his comments during a keynote speech at law firm Eversheds’ annual pensions conference in London on Tuesday. “Risk-sharing, I think, will funnily enough turn out to be the most revolutionary thing I’ve talked about today,” he said.
But questions have been raised over employers’ appetite for shared-risk schemes, which ask them to back more of a DB-style ‘promise’ of future income.
Webb said: “I’m not asking them to go back to DB, I’m simply saying employers will start to see that employees don’t like having all the volatility and risk in their corner. And when that demand is expressed, that space in the middle will become attractive.”
He added that the intention is to have the legislation fully in place by April 2016 in time for the the end of contracting out.
Adrian Boulding, pensions strategy director at insurer Legal & General, asked Webb about conflicts of interest that could arise from trustees marketing CDC to younger members based on the payouts awarded to maturing members, who may be receiving more generous levels than are affordable in future.
“What we have seen in Holland is younger people protesting that older people have been given payouts that are too generous and that the younger people can’t hope to enjoy,” Boulding said.
Webb said it is important to learn from the mistakes of Dutch schemes, which he said failed to communicate to members the nature of their rights. “Overselling CDC would be a crime,” he said.
The minister cited an example of a European pension fund moving members into a CDC arrangement once they reached their mid-40s. He added: “I would be keen to see people market CDC as reduced volatility, I think that’s the strongest objective basis for it. But I think we have to be wary of overplaying it.”
Conservative MP David Willetts, author of The Pinch, which analysed intergenerational unfairness, told delegates the industry had missed some potential “compromise points” between DB and DC, adding: “I don’t think pure DC will be the end of the debate, I think we will see a reaction.”
He said many employers in the future will struggle to shed staff who cannot afford to retire as a result of poor financial decisions, exacerbated by the new freedoms.
“There will have to be ad hoc payments to get them to go,” he said, “which I’m afraid is the pensions cycle repeating itself, because this is the historical origin of company structured defined benefit pension schemes.”
Nigel Stanley, speaking as head of campaigns and communication at the Trades Union Congress, said in the short term the focus should be on good defaults and called for a trust-based decumulation vehicle.
However, for the longer term, he said there should be a “strong public policy initiative” to set up CDC.
Stanley, who is also a trustee member at Nest, added: “I welcome the fact that the current law has been cleared to allow them, I don’t actually think very many will happen, and certainly people who don’t work for big, responsible, dare I say paternalistic, companies will ever get the chance to be in one unless there’s a public policy initiative to do that.”
