In total, the Coalition only announced 11 new bills, but with an election due next May it would be unrealistic to expect much appetite for normal parliamentary work as we approach that point. But even so, the two pension bills – on retirement liberalisation (abolishing the need to buy an annuity) and new group collective schemes, together with some other ancillary changes such as the provision of “advice” for those reaching retirement – are likely to be among the early enacted measures. These are “electoral winners” that both Coalition parties can take credit for.
Sponsors
Yet, the two core bills are clearly from different sponsors, with chancellor George Osborne taking the lead on retirement liberalisation and Steve Webb, pensions minister, promoting the new alternative collective defined contribution schemes, although I would not be surprised if Mr Webb had had some input into liberalisation too.
I have no doubt Mr Webb will go down in history as one of the best pensions ministers ever. Not since David Lloyd George introduced the state pension or Sir William Beveridge produced his landmark report that led to the post-second world war Labour government introducing the welfare state, have we see so much pension change.
Is it any coincidence that Messrs Webb, Beveridge and Lloyd George are all Liberals? Clearly, based on the recent European election and the Newark by-election, the electorate appears to be punishing the LibDems for entering into the Coalition and it is unlikely that we will see Mr Webb back as pensions minister after the next election.
This is a real pity. Obviously Mr Webb has benefited from holding the same job through a full parliament – under the last government we had a new pensions minister almost annually – but I do not put his success down to his longevity. Rather, it is his passion, enthusiasm and know-ledge of his subject. Remember that prior to the last election he was the LibDem shadow work and pensions secretary, and his post at Bath University, where he was professor of social policy, gave him insight into the behavioural sciences that are now part of pension planning.
While I was a little surprised that collective defined contribution schemes were being introduced at this time, it certainly increases options for employers. The best way to look at CDCs is as a halfway house between a defined benefit scheme and a defined contribution scheme.
From an employer’s perspective, there is a known cost, just as with defined contributions. From an employee’s point of view, there is a target for what he or she will receive on retirement – but note it is a target and not a guarantee. In retirement the CDC’s actuaries – yes, we still need actuaries – declare the pension payment for each year.
They can decide to cross-subsidise the generations, by cutting or increasing payouts for workers in a particular age range, reducing benefits if returns are poor or increasing them substantially in good years – although, like with profits, they aim to maintain a steady (increasing) income.
Dutch
The Dutch experience is often quoted where tens of thousands of employees get together in a single pension plan, often built around workers in the same industry rather than a single company. But as history shows, even these broad-based arrangements do not guarantee stability, especially where industries decline. Interestingly, in 2012, a quarter of the schemes in the Netherlands reduced pension payments to restore their finances.
Another fact often overlooked in the debate is that Dutch workers contribute between 21 per cent and 25 per cent of their pre-tax pay to their pensions, but in the UK the average is only 9.4 per cent, although the complexity of our state pension system makes even this comparison a little suspect.
For many years there has been a fierce campaign to allow CDCs, with claims that they can provide “up to 39 per cent higher retirement incomes” than DC schemes. But this figure is based on generous assumptions on the costs of running large CDCs compared with (high-charging) individual personal pensions.
I did a review of CDCs as part of a project I ran in 2011/12 for TheCityUK. Next month I will share with you some of its findings and explain how the industry once again missed the opportunity to take ownership of its own destiny.
For all readers the message is clear: the pensions landscape is changing and we need to keep up to date with developments so that we can provide appropriate advice to our clients.
Dr Peter Williams is an independent business consultant and chartered financial planner