Deciphering the DWP's select committee response

“We intend to focus on ensuring the necessary framework is in place in time for contracting-out ending in 2016,” the Department for Work and Pensions said, in its response to the committee’s recommendations.

It is important to acknowledge that the nature of contract-based schemes is fundamentally different

The government would like to have a pensions bill in 2014, according to Adrian Boulding, pensions strategy director at Legal & General.

“That would enable them to put the defined ambition framework in – and if they could have it done, sorted and on the statute book before the election then that would give employers that want to use defined ambition the time to get it ready and in before [the end of] contracting-out in April 2016,” he said.

Earlier this year, pensions minister Steve Webb said the government’s plan to introduce greater risk sharing between employers and employees would likely need a change to primary legislation.

Defined ambition has been a sticking point for some in the industry. The committee had previously recommended that while investigating options for defined ambition, which will only be an option for a small minority of employees, the government should remain focused on ensuring people are being enrolled in defined contribution schemes that offer high standards of governance with reasonable charges.   

The government agreed and said there was need to focus on DC quality and charges, pointing to its plan to ban member-borne consultancy charging and institute a charge cap on default funds.

A survey by consultancy Hymans Robertson last month found little appetite among employers for a defined ambition approach that mimics defined benefit. It reported 90 per cent of respondents saying they would like to see a DC scheme that gives employees greater certainty about the pension they will receive.

Another 62 per cent of respondents “would be prepared to put in place a system that would help secure a target retirement income for employees without having to contribute more to the scheme”.

Kevin LeGrand, head of pensions policy at Buck Consultants, agreed that for the time being the government should focus on DC, but there was no downside to them focusing on defined ambition in the long-term.

"The sudden move between the extremes of DB and the fairly basic DC schemes has not delivered the level of benefits needed to retire," he said. "For members [defined ambition] would be a good way forward." However, employers are not keen to take on additional risk at the moment, but there will be a place for it in the future as difficulty with getting DC employees to retire arises, he added. The government said it will publish a paper on defined ambition in the summer.

Pushing forward on governance

Scheme governance was also high on the list of the government’s priorities. “One critical element we wish to explore is whether all schemes should have a body overseeing them which represents the interests of members,” the response stated.

“This is part of our wider work to develop further quality standards for workplace DC schemes. Such standards would apply to both trust and contract-based schemes,” the response said.

Tom McPhail, head of pensions research at Hargreaves Lansdown, cited Aviva and Legal & General’s new governance committees as an interesting development. “There is a general recognition that whilst a lot of good governance does go on in contract-based schemes it is important to acknowledge that the nature of contract-based schemes is fundamentally different to trust-based schemes,” he said.

Employers running a group personal pension plan are encouraged to run a management committee that is similar to a body of trustees but with a lighter touch, said Boulding.

Unlike a trustee board, the management committee is an advisory body. “They will look at exactly the same items that the trustees are looking at, such as how are the investments performing, how the administration is performing, whether the scheme is delivering good value for money, and whether the communications are clear.

“[Management committees] would advise the employer that it has discovered concerns, and that action ought to be taken by the employer,” he added.

But the government also rejected the proposal for a single regulator for workplace pensions. Some had called for this in order to eliminate perceived regulatory arbitrage, where employers could be attracted to schemes with less governance burden.