Many issues to address in DA pension scheme
In an entertaining and wide-ranging talk, Mr Webb commented on his plans to introduce Defined Ambition (DA) pensions, a new “middle ground” in pension provision. Broadly speaking, DA sits between the existing Defined Benefit (DB) schemes, where the onus is mostly on the employer to provide for their employee’s retirement, and Defined Contribution (DC) schemes, where the risk and responsibility sits more firmly with the individual.
Savings rates remain low and as the move from DB to DC continues at pace, many employers will be faced with the prospect that increasing numbers of their staff will be unable to afford to retire, making the employer’s task of planning for transition increasingly difficult.
DA is designed to give employees some certainty about how much they will retire on while proving more cost-effective for employers who increasingly cannot afford to maintain DB schemes. Mr Webb confirmed that DA is likely to be an option only for larger employers wishing to provide a higher quality than pure DC. However DA will not be viable if the risk and regulatory burden falls on employers as it does within DB. The contention is that by targeting an outcome, which is constantly monitored from the early years of the scheme, individuals and employers should be more encouraged to commit higher contributions to keep them in line with the target.
Changes to state benefits to be implemented from 2016 should provide individuals with greater clarity and understanding in terms of state benefits and proposals to make consolidation of pension pots easier should make it simpler for individuals to understand their pension position.
Integrating these changes requires careful financial planning with an associated cost, a greater commitment to pension education as well as a much greater reliance on the use of technology to allow individuals and employers to model “what if” scenarios in a clear and accessible way. Whilst an interesting concept, DA needs to address these concerns if the initiative is to have a chance of success.
• David Davison is director at actuarial practice Spence and Partners