The definition of ‘defined aspiration'

Steve Webb has been hailed as the most innovative pensions minister yet, but his latest pronouncement might be a step too far.

Webb has been talking about a “defined aspiration” model for pensions for some months, as opposed to defined contribution and defined benefit structures.
There is already sizeable concern at Webb’s “third way” ideas – and that is before the government has even released details or asked for opinions (a consultation on the matter is promised for this year).

At the National Association of Pension Funds chairman’s dinner in February, Webb said: “Could we move away from the strict divide between defined benefit and defined contribution?

“A ‘defined aspiration’ pension could allow employers to offer a measure of security to their staff, but would have a degree of flexibility that would recognise when external factors – be they increases in longevity, or significant changes in market conditions – make a firm promise impossible to keep.”

Hot air?

Mercer said DA is by no means a new innovation.
“Fifty years ago UK private sector pension schemes were largely based on a DA that was imperfectly communicated, and subsequently much maligned and misunderstood,” said head of Mercer’s regulatory group Deborah Cooper.

“This developed into a nightmare of gold plating as successive governments bowed to political pressure to intervene in the pension contracts that companies had made with their workers. The result is an unwieldy and often unaffordable mess.
“In principle there is nothing that stops companies from setting up a variety of different types of risk-sharing schemes.

“What stops them is they never know what the government is going to do next. For DA arrangements to take off, employers need reassurance that the contract made between employer and employee would be sheltered from the whims of politicians.”

Employer demand?

With DB schemes fading fast, it is easy to imagine demand for DA amongst members, who would stand to see their employers take on more of the share of risk than with DC.

But how can more risk be attractive to employers? Association of Consulting Actuaries chairman Stuart Southall said the government would have to work hard to sell DA to hard-pressed employers.  “We believe the government will have to take some meaningful steps to stimulate the DA range of schemes,” he said.

However, Society of Pension Consultants chairman Kevin LeGrand said the government would be able to sell DA to employers if it informs them of the benefits of being able to move staff into retirement now that the default retirement age is gone.

“Many must be persuaded that basic DC is still going to cause a problem for them when employees start postponing retirement because they will not have enough income,” said LeGrand.

At odds with policy

Barnett Waddingham consultant Malcolm McLean pointed out the apparent discord between auto-enrolment, Webb’s flagship policy, and the sudden interest in DA. 
McLean said: “The government has come to this at the very point where millions of workers are about to be auto-enrolled into largely bog-standard DC schemes.”

LeGrand added that millions of small employers will set up pension schemes for the first time under AE, and due to the cost and complexity of hybrid schemes, they may not be an option for some time.

Convincing the public

Savers are already apathetic about DB and DC, making selling them a new type of pension difficult, experts warned.

Silverman Sherliker partner Jennie Kreser said: “I do not think people understand what risk sharing means. Explaining it to a cynical public could be challenging.”

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• Topics
• Industry
• Steve Webb
• NAPF
• Mercer
• Kevin LeGrand
• Society of Pension Consultants
• AE
• DB
• DC