Pots and plans

Bill McKenzie on improving the government's pensions reform legislation 

The Pension Schemes Bill, which gets its Second Reading in the House of Lords today (Tuesday), focuses on three important areas: a framework for collective defined contributions (CDC) pensions, a Pensions Dashboard, and enhanced powers for the Pensions Regulator.

To date, much of the consideration of pension policy has been conducted in a rather binary manner, with the emphasis on the ‘choice’ between a defined benefit or defined contributions arrangement.

With the former model, there is the promise of a pension of a certain value. If a scheme’s assets are insufficient to provide this, if falls to the employer to make up the shortfall. For the latter, money is invested to build up an individual members ‘pot’. That can be taken, one way or another at retirement but it buys what it buys – and there are no employer guarantees. Indeed, many schemes have been closed.

Defined contributions change the dynamic, in that they are pooled and invested collectively. Pensions are paid from the scheme assets at a target level, as determined by an actuary. So investment, longevity and inflation risks are borne collectively, and members don’t have to make individual choices about investment or how to convert it to income when they retire.

The impetus for a more focused approach to legislation to enable CDC has come from Royal Mail and the Communication Workers Union, following company proposals to close a defined benefit scheme. The argument is that CDC’s can benefit from economies of scale and enable a time horizon on investment beyond the individual, potentially including infrastructure investment.

While such schemes can produce a better outcome than others, this is not guaranteed. Pensions can be reduced and there is no recourse to a sponsoring employer. The fact that the level of a pension will be set by actuarially determined target rather than binding commitments will require strong communications with members.

Labour gives a qualified welcome to this legislation, but it comes with a plethora of regulation-making powers. These include authorisation criteria, scheme design, financial sustainability, systems requirements, and rules touching upon calculation of benefit. We are therefore, calling on Ministers to urgently bring forward the related SIs so that we can better go about our scrutiny role. And we need this information no later than Report stage.

In terms of the proposed dashboard, we know that the move away from defined benefit schemes has seen a growing tendency for individuals to lose track of their pension pots. Not surprising, given that the average person has around eleven jobs during their working life. But two thirds of UK adults have multiple pension pots and we know that surveys suggest some 6% of these have become separated from their owners.

Our preference would be for a single, publicly-funded dashboard but Ministers are heading elsewhere. Either way, robustness and security of data are fundamental to the outcome of the project.

Finally, while we welcome the government’s intention to strengthen the hand of the Pensions Regulator, more should be done to encourage use of existing powers.

As with much of this Bill, the objectives are worthy, but the devil sits deep in the detail.

Lord (Bill) McKenzie of Luton is Shadow Pensions Minister in the House of Lords

Published 28th January 2020

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