Death knell for final salary in pension rejig
A NEW workplace pension model was proposed yesterday in an effort to limit the financial risk for both employers and employees.
Under the controversial proposals, the Department for Work and Pensions (DWP) has suggested an employer can end a final salary pension scheme when an employee leaves the firm, thereby cutting the firms’ risk exposure.
Pensions minister Steve Webb wants the new so-called “defined ambition” model to provide a middle ground between current defined benefit and defined contribution schemes.
Currently final salary schemes leave the employer facing the risk of funds falling short, while defined contribution schemes leave savers facing the risk.
The new suggestion could see a defined benefit pension scheme come to an end when an employee leaves their job and converted into a cash sum to go into a subsequent pension, thereby ending the employer’s risk exposure.
The DWP has also suggested an insurance scheme could be used to guarantee savers get at least as much out of pensions as they put in.
The government also warned pension funds it may cap fees if it deems them excessive, while also noting that the incoming auto-enrolment regime could in future be accompanied by an auto-escalation system to encourage savers to put away more money.
But analysts fear the proposals could add to confusion on pensions. “What workers and employers most need is a simple, stable regime so that they can plan for the long term,” said PwC’s Peter McDonald. “Constant tinkering with the pension rules has left employers disillusioned and there is little appetite to take on any more risk.”
WHAT DOES DWP WANT?
■ The proposed “defined ambition” pension aims to split risk between employers and workers
■ It could work by creating a new insurance pot that would be used to ensure savers get at least as much out of their pension fund as they put in, reducing the risk associated with defined contribution schemes
■ Alternatively, defined benefit schemes could be made less risky for the firm by transferring existing savings to a new employer when the saver moves jobs – but that would mean the “final salary” element ending when the saver leaves the business
■ On fees, DWP says it could monitor charges more vigorously, particularly as smaller firms are forced to set up pension arrangements in the coming years through auto-enrolment
■ If charges are deemed excessive, ministers could cap fees
■ Alternatively it suggests a “star rating” to show which funds are officially approved as behaving well on fees, governance and transparency
■ Creating large, multi-employer pension pots could help increase scale in the industry and reduce costs for firms and employees, DWP suggests
■ Auto-enrolment could be accompanied by an automatic escalator to encourage saving beyond the minimum mandated level
■ The current plan sees workers automatically signed up to save eight per cent of their income – four per cent from the individual, three per cent from the employer and one per cent in tax relief from the government, by the time the programme is fully up and running in 2018
■ Under auto-escalation employees would simply agree to raise contributions and see increasing proportions taken from their pay packets when their salaries rise