Yahoo Finance Minister launches ‘social justice mission’ against Britain’s most generous pensions
Pensions minister Laura Trott has said it is her “social justice mission” to close the income gap between gold-plated “final salary” pensions, mainly used by the public sector, and the less generous schemes most private sector workers save into.
“Defined benefit” pensions guarantee an inflation-proofed income in retirement for life.
Most public sector workers, including MPs, are members of these schemes but they have all but vanished in the private sector.
These workers typically save into defined contribution schemes, which invest their savings over the course of their career and are vulnerable to shocks in the stock market.
It means that while retired public servants receive a predictable income each year, most other retirees have to constantly monitor their pension to make sure they do not run out of money.
Ms Trott, who became pensions minister less than a year ago, said she approached all of her roles with a “need to define a social justice mission”.
“I needed to find the thing that I was fighting for in the Department [for Work and Pensions]. And for me that was quite easy from a DB, DC divide,” she said.
“I didn’t think it was fair… the differential between those who retired on a defined benefit pension, which is guaranteed and can fall back on the PPF [Pension Protection Fund] if there is a problem, and the risk which falls entirely on the individual in DC, with not enough focus, in my view, on the returns people were getting.”
A spokesman for the minister said that her comments did not refer to the divide between public and private sector pensions, but open defined benefit pension schemes are rare outside of the public sector.
Last year former pensions minister Guy Opperman admitted his own public sector pension was “unstainable”.
It comes just weeks after the pensions regulator warned thousands of poorly-performing pension funds would be shut down if they failed to improve investment returns.
Nausicaa Delfas, the new boss of the regulator, said: “No saver should be in a poorly performing scheme that doesn’t offer value for money.
“Where we find poor performance, the message is clear: wind up and put your members into a better run scheme. Or we will consider all powers at our disposal.”
Meanwhile, retired public sector workers have received their biggest pay rise in a generation this year. The value of public service pensions grew by 10.1pc in April, as the Government is legally bound to increase their income in line with the previous September’s inflation figure, which hit a 40-year high last year.
Taxpayers paid as much as £4.5bn to honour the cost of these gold-plated pensions, according to estimates from the pensions firm Canada Life.
Ms Trott noted the Government was working with the pensions industry on how to create a “value for money” framework for pension savers, which focuses on investment performance, customer service and charges.
“I want to emphasise that when I talk about value for money, I do not just mean low costs. Focusing on costs and not returns is something that I think has been the strand that has led to underperformance in many of our pension schemes,” she said. “Value for money means that savings are invested well, that they are not being eroded by high charges,” she said.
The pensions minister added that she wanted to push forward on the expansion of “collective defined contribution”, or CDC schemes, similar to systems in Australia and Canada. These allow both the employer and employee to contribute to a collective fund which provides an income in retirement – but unlike a defined benefit scheme, the income is not guaranteed.
It means pension fund managers can spread longevity and investment risk across all of the people saving into one scheme, rather than one worker assuming all the risk by themselves.
The pensions regulator authorised Britain’s first CDC scheme at Royal Mail earlier this year, which Ms Trott hailed at the time as a “landmark moment”.
