Trustee briefing: ‘Defined ambition’
Engaged Investor explains what ‘defined ambition’ means and why it should matter to trustees
Pensions minister Steve Webb made headlines in last weekend’s newspapers when he told the Daily Telegraph that the government is investigating options for a “new model — the defined ambition pension — where the risks and uncertainties are more evenly shared between employer and employee.”
The new model of pensions provision would be a compromise option, somewhere between defined benefit and defined contribution, sharing risk more evenly and designed to lead to a better outcome for future pensioners.
Webb is exploring risk-sharing concepts found elsewhere in Europe. Among other ideas, he will consider the “cash balance” scheme, popular in the US, where a company provides a guaranteed pension but the employee bears the risk of how much of a pension that pot will buy.
Webb hinted that the government may somehow incentivise firms to take on more risk: “I am hearing increasingly that firms would be interested in doing more risk-sharing if they had greater encouragement to take on risk.”
What does this mean for trustees?
Eagle-eyed trustees will realise that Webb’s statement is not news in itself. A ‘third way’ between defined benefit and defined contribution is widely seen as a necessity in the industry, and Webb has championed the notion in recent months.
As we already know, the government will launch a consultation later this year into reinvigorating workplace pension provision.It is well documented that most defined contribution pension schemes will not give savers an adequate income. It is also increasingly accepted that defined benefit schemes are on their way out.
By introducing a compromise option, Webb is trying to improve future pension provision. A predictable pension which steers employees towards a tangible retirement outcome can only be positive for employers and trustees of defined benefit schemes, which are notorious for their utter unpredictability.
However, Sarah Smart, chair of trustees for the Pensions Trust has voiced concern that Webb’s move could widen the pensions gap: “Much of what has been discussed would still leave schemes technically as defined benefit and therefore would be impractical for multi-employer schemes and smaller employers – and the last thing we would want is a widening in the ‘pensions apartheid’.”
Convincing employers who have recently introduced defined contribution schemes that changing the rules of the game is a good idea may be an uphill battle. Defined ambition schemes are likely to entail the employer taking on a bigger share of the risk; many employers, with the recent expensive memory of defined benefit schemes at the forefront of their minds, may be disinclined to do this unless the government offers them a serious incentive.
At least in the short term, Webb’s Telegraph piece will not have any immediate repercussions for trustees, but it’s worth monitoring developments on this subject as it may have wide-ranging implications for pensions provision in the UK.
The government will launch a consultation later this year into reinvigorating workplace pension provision. These issues will be discussed further in that consultation paper.
“We’ve had such a substantial shift, it’s almost from black to white, from employer takes on risk to employee takes on risk. There have been no shades of grey in between. We could see a cycle where we move from DB to DC, start moving back towards some version of DB, before people realise it’s unaffordable and start moving back towards DC! That could be the cycle that we see happen over the next couple of generations,” predicts Britt Hoffmann, head of DC at P-Solve.