Millions of individuals around the country already face a daunting task saving enough for retirement.
But the challenges of saving adequately for old age are set to get much tougher due to the economic crisis wrought by the pandemic. Hundreds of thousands of workers are no longer saving into auto-enrolment workplace pension plans, and benefiting from an employer contribution to their retirement fund, having lost their jobs since the pandemic outbreak in March.
Those who are still fortunate to have a job could see their employer pension contribution become less generous or themselves be tempted to opt out of their workplace scheme to divert savings to deal with an immediate cash crisis.
Against this troubling backdrop, proposals by The Pensions Regulator threaten to ramp up retirement insecurity for around a million members of traditional final salary-style pension schemes which deliver a secure income in later life.
Over the past seven months the regulator has been seeking views on a major shake-up of its rules which govern funding arrangements for the UK’s 5,500 defined benefit pension schemes, with more than 10 million members.
These proposals are important not only for members promised secure pensions, but also sponsoring employers who potentially face steep rises in their annual contributions, under the new tougher regime.
At a high level, there was little to argue with the regulator’s ambition to make the DB funding system more resilient, sound and clearer for trustees in terms of the type of funding plans the watchdog would find acceptable.
Following a recent spate of corporate pension scandals, the resource-constrained watchdog needed to develop a more efficient way of supervising schemes and ensuring they were not at risk of being left under-funded by irresponsible company bosses.
A new way of assessing valuations would see funding plans subjected to much tougher scrutiny if both the employer and trustee proposed taking a greater level of investment risk, or paying a deficit over a longer period, than a new benchmark set by the regulator.
However, a perverse outcome of the proposed overhaul could see the closure of hundreds of schemes that remain open to new joiners, worsening retirement outcomes for a generation of savers.
At the heart of the regulator’s shake up is a requirement for trustees and employers to agree a long-term plan, which would gradually wean the scheme off the cash support provided by the employer.
The way to achieve this, according to the regulator’s proposal, would be for schemes to wind down their holdings of riskier assets, such as equities, to minimise volatility risk in the fund and with it the likelihood of employers being asked to step in if the market takes a bad hit.
But while asset de-risking is less troubling for a scheme that is closed, or not building new benefits, it sets up all sorts of difficulties for “open” schemes with a different investment approach because they are taking on new members and accruing new pension promises.
A clear message to open schemes from the new system would be to move away from assets that could generate potential returns, which would put more pressure on sponsoring employers and members to fill any funding gap with extra contributions.
As former pensions minister Baroness Ros Altmann said, this is a recipe for failure of open schemes.
The implications of the revised code are potentially significant for around 1m members of the 600 schemes that are still taking on new joiners, including lecturers and librarians saving into the giant Universities Superannuation Scheme and train drivers who are members of the Railways Pension Scheme. If these schemes close around half a million members are likely to be shifted into riskier workplace plans where there is no certainty over what their fund will be in retirement.
Concerns about this aspect of the regulator’s overhaul have been raised in the House of Lords and an amendment has been passed calling on TPR to recognise the differences between open and closed schemes in terms of their investment strategy.
The next year is likely to be tough on employers and there is no doubt that pension promises are under strain from rising longevity and the prolonged low interest rate environment.
But measures that drive contributions up to unaffordable levels, and push members into more insecure retirement arrangements seem at odds with an ambition, set out in the government’s DB White Paper, to enable the best deal for members and to not place any extra burdens on business.
The regulator would be well placed to listen to concerns of members, unions and the Lords about the impact of its proposals on healthy open schemes and consider a system that protects both future workers as well as pensions that have already been built up.
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