DC or not DC – is that the question?

Steve Webb, the latest in a very, very long line of Pensions Ministers wanting to make his mark, has announced that the government is talking to companies about creating a new framework for pension schemes. The government is considering several options that might become, what the Minister terms, a ‘defined ambition’ plan, that would give more security to retiring workers while allowing employers more opportunity to innovate towards risk-sharing pension designs.

Current legislation does not lend itself to innovative risk-sharing ideas. However, Steve Webb has suggested that the legislation could be changed to encourage more companies to consider risk sharing. Amidst a fair amount of barracking for this announcement, the NAPF and Association of Consulting Actuaries have supported the idea.

Didn’t Rowntree do this 100 years ago?

The model quoted by Steve Webb, the cash-balance scheme where employees would receive a fixed pension pot to invest at retirement, isn’t particularly ground breaking or ambitious (didn’t Rowntree do this 100 years ago?). Employees would still be at the mercy of uncertain investment performance, meaning that if their pension funds were not on target they would have to contribute more. And the income they might receive at retirement would be subject to annuity rates at that time.

Nevertheless, by raising the idea of a new pensions framework, has the government woken up to the fact that the public doesn’t trust defined contribution pensions? Actual and assumed investment performance simply isn’t good enough to give any sort of security. And despite some decent efforts to explain the uncertainty of investment and annuities, the lack of guarantees has led to a real fall in private pension savings.

Interesting timing for this announcement, with auto-enrolment due to be launched. Many companies will now be in the midst of changing their scheme design, tackling the huge administration headache and thinking about how to communicate the benefits of defined contribution pensions to employees who are not currently saving for retirement.

Where does this leave auto-enrolment?

Will it be another major mis-selling fiasco? Constant tinkering of pension designs that are ultimately not fully understood by the end consumer will not fix the real pension dilemma. We need to focus on why the public doesn’t engage with retirement savings. Many experts cite lack of interest in pensions, but perhaps the real issue is about trust and credibility. We tend not to trust things we don’t understand and there’s little doubt that very few people understand the defined contribution pension design.

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