Hi I’m Gillian Smyth, and I work as part of the Defined Ambitions Pension Team at the Department for Work and Pensions (DWP).
As part of our work to shape a system of pensions that meets the needs of future generations, we’ve recently launched a formal consultation on 'defined ambition pensions'.
Through this blog, we wanted to make a space for people involved in pensions to have a slightly more informal say about the issues that matter to them around this consultation.
What is the consultation about?
The private pensions market is currently dominated by two main models:
- defined benefit - in which the employer bears all the risk relating to the promised benefits, including investment, inflation and longevity. This can result in high and volatile costs.
- defined contribution - in which the member bears all these risks and the uncertainty of not knowing how much pension they will have when they retire.
We’re launching this consultation to seek views on how we might support a greater range of schemes that share risk between a range of parties. This could be employers, members, investors and investment managers.
What we need from you
We’d like to hear your views on the various pensions models within the consultation, and the role these new schemes could play in the UK workplace pensions market.
Feel free to develop points made by other users, ask us questions or start discussions around the options in the paper and how they might work in practice.
Please post your thoughts or comments in the box below. We’ll read each one and follow up as many as we can, either on this page or in future blog posts.
The small but important print
Comments on this blog will not be treated as formal responses to the consultation. Formal contributions must be made on the consultation itself.
24 comments
Comment by Alistair McQueen - Aviva posted on
Great to see innovative use of online blogging to share comments. First time, I think. Worth a try.
Comment by Alan Higham posted on
Firstly, it was an exercise well worth doing whatever I or anyone else might feel about it being 'too little, too late'.
I suggest you pick out the 'quick wins' in DB regulation & implement quickly. What have do you have to lose?
Guarantees in UK/EU regulatory environment cost too much for employers to provide and employees to purchase by choice.
Employers' costs are mainly accounting driven and so international accounting standards are a major driver and limitation on the art of the possible.
DWP and the UK Government will have limited sphere of influence in these two areas.
DWP should allow discretionary benefits to be provided wherever possible provided that the pension offered meets a minimum quality standard suitable for auto enrolment. DA reform needs to consider auto enrolment policy around qualifying schemes.
The issue around discretion whether in a DB or DC context is governance & member communication. Setting an effective regulatory framework in these areas is crucial.
Pooling risks over the long term requires inter generational subsidies and you will, I think, need to accept that in order to make any progress.
CDC is worth exploring but it is vital to make sure members have reasonable expectations and that the scheme can be understood by, not just communicated to, members. As a first step therefore, you should avoid putting modelling estimates in the public domain that do not reflect current financial realities around the provision of guaranteed pension income. Put simply, equity investment outperformance cannot be certain.
Combining life insurance to cover death before retirement and longevity insurance to cover the risk of living too long in a single premium paid on behalf of every working employee could in my view be an effective way to finance the riskier and more costly aspects of retirement.
I think the DC sub group focussed too much on issues that are really way out of scope for the UK Government let alone just the DWP. There are some important aspects of current DC benefit regulation, largely sitting with HMT< that are worth looking at, namely:
1. re-thinking the rationale behind the drawdown rules - I have written to the Government Actuary with my detailed thoughts and asked him to pass these onto HMT.
2. allowing guaranteed life time annuities to decrease as well as increase, people have greater spending needs in early retirement.
3. accessing pension fund capital to fund care costs - this is a particular example of one of the points that emerge from point 1. above
Well done to Steve Webb and the team for refusing to accept that the patient has already bled to death. There may be some life there, if not now, then certainly in future.
Comment by jonpaul posted on
Thank you for being the first to post on the DA Blog!
Whilst we won’t be able to respond to every posting, be assured that we will read and analyse them all, and that they will help inform the consultation.
Kind regards,
The DA Team, DWP
Comment by terry sheridan posted on
May I begin by stating I am a private individual.
I am also a deferred member of a large DB scheme. Anyone reading today's Telegraph (8/11/13) who is also a DB scheme member would be alarmed at the proposed changes. I thought it prudent to read the consultation paper myself.
Having read the document my heart has stopped racing - my interpretation is that the proposed changes protect rights which have already been accrued and therefore deferred and current pensioner member of DB schemes have a great deal of protection and active members have protection for accruals prior to any new legislation.
I was concerned that the changes mentioned in last year's Reinvigorating Workplace Pensions regarding allowing employers to transfer "leaving" employees from a DB to a DC scheme might impact myself as of course I no longer work for the employer. Chapter 3 section 24 states - However, if the employee leaves their employment before retirement, the amount of pension benefit they have accrued in the scheme is crystallised and the cash value transferred to a nominated DC pension fund.
When I read the above I interpreted it as meaning that this only applies in future and would not impact people such as myself who have an existing deferred pension (not withstanding the section entitled Including Past Accruals. Clarity around this would be helpful to prevent deferred members thinking they must take their pensions before legislative change to enable Flexible Defined Pensions.
Am I interpreting the document and the intention correctly?
Comment by Ed posted on
This would make an interesting move for Civil Service pensions, which were just recently changed from defined benefit to defined contribution on the grounds that they were untenable.
Comment by Keith Ferguson posted on
I too write as a private individual.
Newspaper comment relates explicitly to the withdrawal of “survivor rights”, i.e. the requirement of schemes to pay a proportion of the member’s pension to a surviving spouse. If that obligation is removed, the message to families who choose to have one parent stay at home is “You can’t, or if you do, you could be left in difficulties in retirement should the income earner in the family die”. Is that the message that this Government wishes to convey?
The references to survivor benefits are few, obscure and unclear. For example, in the Consultation document, Chapter 3 Para. 21 it merely states that “We will consider whether we should provide a statutory override to enable existing schemes to change the rules in relation to future accruals more easily.” In other words, there is no specific proposal put for consultation, and anyway no question is invited on the specific subject of survivor benefits – this on a matter that could affect millions of people.
And a six week consultation only on wide ranging proposals on pensions that are so far reaching?
Comment by Sam Gilbert posted on
I can confirm that the ending of the statutory requirements for survivors' benefits from Defined Benefit schemes has nothing to do with the Government’s proposals for Defined Ambition pensions. It relates to the proposed introduction of the new single tier state pension in 2016.
Subject to Parliament agreeing, the additional state pension will end and employers with Defined Benefit schemes who have contracted out of the state second pension, will no longer pay lower national insurance to reflect the benefits they provided instead of the state. These include survivor benefits.
Firms will however be required to provide accrued benefits, including survivor benefits in respect of past service.
It is important to note that schemes that are contracted out have always tended to make more generous provision in relation to survivor benefits than required by the contracting out rules, so we do not expect this to change with the ending of contracting out.
There are no statutory requirements to pay survivors benefits for employers who provide Defined Benefit schemes that have not contracted out of the state second pension. So this is already a matter solely for the employer.
Comment by Alan Higham posted on
Terry, the proposals do not include allowing your scheme to be able to force you to accept a transfer to a DC scheme. Private pensions earned to date enjoy protection under EU property laws which means Governments can't easily reduce the value of your pension without your consent and the DWP made it clear that its proposals related to pensions to be provided in future.
Comment by Mark Borthwick posted on
As a deferred member of two defined benefit schemes, I am now unemployed after being made redundant with pensions being payable undiscounted at 55. This is my only financial security.
Consultatons like this add great stress and financial worries to many 10s of 1,000s of people.
I feel this group should quickly provide certainty around the extent of retrospective change of this exercise, especially after recent newspaper headlines..
For instance, for those people who have accrued years of earned benefits to a scheme, what is now up for retrospective change?
A. Will government and schemes be able to remove widow rights retrospectively for those members that have years of earned benefits?
B. Will government and schemes be able to change from CPI (and RPI in some cases) increases to no increase retrospectively for those members that have years of earned benefits or more worryingly current pensioners?
C. Will government and schemes be able to change minimum age from 55 upwards (so shortly after many moved from 50 to 55) for deferred members who left presuming terms were promised and static?
Whilst I support the debate on change going forwards when schemes and members can choose new terms offered and accepted, the suggestion that any financial security built up over 30-40 years can be taken away by government at a whim retrospectively is a very bitter pill for widows and members who would quickly be heavily impacted by inflation or whom have calculated and taken very hard life choices to support sickness in the family, to then find their presumed pension rights for payment of a pension at 55 is now removed.
I having read the consultation am very concerned it appears to seek comments from pension schemes and little from pensioners, deferred members and existing scheme members.
The statement on retrospective change would at least remove unnecessary worry.
Comment by Sam Gilbert posted on
Thank you for your comments. In response to questions A and B, the DA proposals will only impact on future accruals of benefit. Past accrued benefits of members active in the scheme are out of scope. Deferred members or pensioner members will not be affected either.
The minimum age relates to tax rules and is the earliest age at which pension benefits can be taken. Most schemes have a higher normal pension age and it is changes to this - not the minimum age - that we are consulting on. Schemes will still have the option to allow members to take benefits earlier than the normal pension age (often actuarially reduced to take account of the early payment.) No change to this is proposed.
In reference to your final point, in parallel with this quite technical consultation, we are undertaking in-depth research to test the proposals with a variety of stakeholders including members of pension schemes. This is summarised on page 15 of the paper.
DA Team, DWP
Comment by steve posted on
Hello..I am a member of a FS DB scheme. It is operated by a very profitable and solvent FTSE100 company with international interests. The pension scheme is fully funded and solvent and able to meet is obligations. It was closed to new entrants some time ago. My company fully supports the FS DB and also the new DC scheme in providing quality pensions to its employees. Many of my colleagues are around the age of 50 to 55. If your reforms became law next year,what losses in terms of benefit could they incur?
It seems to me that my pension is between me and my employer and non of HMGs business. Is it fair and reasonable that in my situation,i should have the rug pulled from under me when i am not far from retirement and yet MPs and the public sector who i also fund via taxation are somehow magically excluded?
Mr Webb and others continually use rhetoric such as "gold plated" FS schemes to deliberately marginalise them ,create envy and give the impression that we will all live as well as he does when we retire.
That is not the case. We will have a decent pension and no more unlike he and his civil service colleagues
Comment by Mark posted on
I would like to reiterate the points made by Mr Sheridan and the questions he raises. Clearly the media have applied a view to the proposed changes and has as a result generated a lot of fear. It would be helpful if the department could state clearly and unequivocally what the proposals would mean to those with deferred pensions and those in receipt of db pensions..
Comment by Hannah posted on
I applaud the use of an open blog but it's obvious that there's a bit of a problem here! Perhaps, to avoid this becoming sidetracked, you could introduce a drop-down in the comment section so that people could select what aspect of DA reform or the consultation their comment relates to - and if their comment relates instead to concerns about their accrued benefits, you could redirect them to a separate specialised member queries page?
Comment by Sam Gilbert posted on
Thanks for this Hannah, we will look into this once the blog picks up pace.
DA Team, DWP
Comment by Mark posted on
Hi Sam/Gillian,
What effect do the proposed changes have on existing db deferred pensions and db pensions in payment ?
I believe that this where the greatest degree of worry exists.
Comment by Sam Gilbert posted on
Hi Mark, thank you for raising this. if you look at the comment made by Mark Borthwick on 8/11/13 and my reply this should answer your question and alleviate your worries.
Thank you
DA Team, DWP
Comment by terry sheridan posted on
On Saturday the Independent provided it's analysis of the DA report.
The analysis being that "The bottom line is that firms look at these schemes as an almost unquantifiable risk on their balance sheet and a risk many of their competitors got rid of years ago"
The conclusion being that DA is a Frankenstein Pension because the day of the final salary pension is at an end and all this is an attempt to do is to reanimate a corpse.
Comment by Gillian Smyth posted on
Hi Terry, thank you for your comment.
Whilst acknowledging that "This is all highly intelligent stuff and frankly more realistic than I first feared when Professor Webb first mooted 'defined ambition' over a year ago". The Independent report was rather superficial on the detail.
Rather than "reanimating a corpse", the paper proposes to make it easier for employers to sponsor new pension schemes where benefits accrue on a specified basis (e.g. related to salary - not necessarily final salary); and also to allow additional flexibilities for future accruals only within existing DB schemes, including the possibility of allowing a statutory override to facilitate these changes. The details are summarised on page 7 of the paper.
We have met with many employers and evidence from these discussions shows a real appetite for DA, including the ideas for flexible DB. So we are not trying to 'reanimate a corpse', rather helping employers who want to continue to offer these types of schemes to manage the costs and volatility in the future.
Thanks, DA Team, DWP
Comment by Nick Foster posted on
One of the proposals made for encouraging the adoption of DA is a sliding scale for the PPF risk based levy to reflect the amount of risk transferred away from the employer compared to a traditional DB plan. There are already provisions within the PPF valuation regulations for valuing cash balance schemes differently for levy purposes, but I think the differentiation in this case should go further. For instance, the investment stress could have +16% applied for schemes with average age within a year of average NPA, to reflect the current stress for investing in annuities, reducing to 0 for schemes with average age more than 10 years below average NPA.
Comment by Gillian Smyth posted on
Hi Nick,
Thank you for your thoughts on the PPF levy. At this stage we are not consulting on how the levy might be applied for DA schemes, but should we proceed with the proposals in the paper, we would expect to include this in a future consultation.
DA Team, DWP
Comment by David Fairs posted on
As chair of the flexible defined benefit part of the DA Industry Working Group, I declare a vested interest in the discussion.
It might be helpful to say that in terms of evaluating ideas, we had some guiding principles. Firstly, where an employer makes a commitment or "promise" to provide a certain level of pension, there should be no watering down of the regulations in place today around the delivery of that commitment. In other words, the requirements around funding and governance should be the same as today for the pension that is "promised". However, where an employer provides a discretionary addition, then there could be more flexibility aorund that element.
Our second principle, was that there should be clear separation and communication around what was "promised" and the element that was "discretionary" and which might only be provided if economic circumstances were favourable.
We therefore saw each of the ideas in the context that each member in the scheme would be given clear communication about what was promised (and the employer would be on the hook to deliver) and what was aspirational from the employer and may or may not be delivered in due course.
It seems to me that many final salary schemes reflect a pattern of work and society that has changed much since many of those schemes were originally designed - people change jobs more frequently, less people are getting married but those that do get married today seem to stand a 40% chance of ending in divorce. Life expectancy for a 65 year old has increased dramatically so the proportion of time in retirement vs work is growing dramatically and therefore the cost of providing a given level of pension from 65 has probably doubled over the last 50 years.
Undoubtedly, there will be some employers that will want to do the bare minimum but it seems to me, here is a bold initiative that allows employers, who do want to do more, to design a more flexible arrangement that does not impose all the risks on either the employer or employee and can deal with the changed world that we now live in.
Comment by Alan Marnes posted on
Hi All, this is my 1st ever attempt at blogging.........I was at the TUC this week where D.A. pensions were on the agenda, I promised Sam Gilbert I would write something and here goes. Please forgive spelling mistakes as I left school before my 15th Birthday with no qualifications at all.
Ever since I left school I have been working towards pension age, I have contributed to Graduated Pensions, S.E.R.Ps and SERPS opt out, a company none contribution scheme, a stake holder pension, a company DB scheme, an A.V.C. and lastly several small insurance based endowments, so I know a bit about pensions. Just forgot I was back in the Second State pension from 2002.
I have been a trustee for both a D.B and a D.C. scheme.
Right now to D.A.
This seems to me to be another way for government to push yet another pension system into the market just to make money for the big providers shareholders, it will do nothing to restore the trust in UK pensions, and until we all have the same opportunity that Politian's have given themselves and senior civil servants, then nothing will make me think otherwise.
Pensions must be made to work for those who pay into them, and not for them that administer or run them. You only have to look at those that are pensioners who struggle with their small incomes, and compare them to the people that run the various schemes or there shareholders. I asked many times who does the pension scheme work for?
D.A. may well be the way forward, but if it is then it must be run and administered by government, not insurance company's. Any new scheme must take transfers from older schemes and then close down some if not all the other confusing schemes.
Finally to make pensions work, there must be a better return on investment that the current annuity system, why would anyone want to pay in all their working lives, only to have a pittance of a return if you live long enough, as opposed to share holders who get dividends and they can get at their capital at any time.....Rant over........
Comment by Terry Monk posted on
I would like to understand what protection employees get if their company fails , benefits lost and compensation is quite clear under the PPF for DB schemes , as someone involved with the FAS where compensation is not what Government promised I would like to understand what security members would have and how compensation would be calculated
Comment by Jim. Presland posted on
Defined Ambition Eh.
If auto endolment and NEST pensions were said to be the bees knees then why roll out another name?
Pensions are all about guranteeing the future and trust that they will deliver.
If the govenment want to get people to trust what they are doing then they must get things right from the past and treat people fairly.
Defined ambition pension must be run along the lines of S.E.R.Ps. / 2nd state pensions, as they worked well.
They must be kept in the public purse and not in the private sector.