Membership of workplace private sector pension schemes has been in decline for nearly half a century. Many governments have passively watched this decline whilst some have actively made matters worse.
The introduction of automatic enrolment into workplace pensions is already a huge step forward. Starting with the biggest firms, businesses now have a legal duty to choose a pension scheme for their workforce and to make a contribution into it. Employees will also contribute and the Government chips in through tax relief.
Over the next five years, around 11 million workers mostly people who have no current pension provision will be placed into workplace schemes.
But we need to go further, and that is why we are today publishing our strategy to ‘reinvigorate’ workplace pensions.
The first part of this strategy is to promote high quality in the schemes used for automatic enrolment. This includes features such as value-for-money on charges, good governance and making sure that people who make no active choices about how their money is invested are properly catered for. One option would be for pension schemes to be given ‘star ratings’ so that employers knew that they were choosing a quality scheme and employees valued that provision.
Our objective is pensions that employers can afford and that employees will
appreciate. Whilst most firms will no longer offer a traditional ‘defined
benefit’ (DB) pension, where the amount you get is a guaranteed proportion
of final salary, many are willing to go for more than a pension where the
only thing that is certain is how much money goes in. We are therefore
working on creating pensions which offer greater certainty than pure DC
pensions, but without all the cost and burden of DB what I have christened
the ‘defined ambition’ or DA pension.
Our document today gives more detail about what the Defined Ambition pension could look like.
One option is slimmed-down DB. For example, the future pension promise could be limited to a cash figure at retirement with any inflation-protection post-retirement conditional on the investment performance of the fund. Alternatively, the pension promise could last only as long as you work for your current employer. When you leave, it crystallises into a cash value which you can take to a new pension scheme. This approach would be valued by firms who do not want to retain pension obligations for workers who have left them many decades earlier.
Another option is enhanced DC. This could mean adding some form of ‘smoothing’ so that the pension outcome is much less uncertain than under pure DC. There is, of course, a cost to greater certainty. But our evidence is that people of all ages and all income levels value greater certainty about their retirement income.
Getting millions more people into workplace saving is a huge start, but it is not enough. There is now a lively debate about how we make sure that there is not just a greater quantity of people in pensions but a greater quality of workplace pension provision.
Our report today is an important milestone in setting out how that vision can be delivered