Out-Law News 3 min. read
13 Feb 2012, 2:40 pm
In comments reported by the Daily Telegraph, Steve Webb suggested a "move away" from the current system of defined benefit schemes, which have become prohibitively expensive for employers to provide in recent years, and defined contribution schemes under which benefits made available to employees are less generous.
"Is there a third option, which would ensure that individuals are not left to shoulder the entire risk of their pension saving, and employers can offer pensions within a lighter touch regulatory regime? At the moment we have an absurd situation where, if an employer attempts to offer more certainty, it is immediately classed as 'defined benefit' and then subject to myriad regulations and restrictions. Employers are increasingly giving up in the face of these obligations," he said.
A compromise scheme, which the minister called "defined aspiration", would offer a measure of security to staff, according to the Daily Telegraph. The new schemes would however have a built-in degree of flexibility, meaning that employers would not be left with overly burdensome pensions obligations if the scheme lost value.
Defined benefit pension schemes promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. According to a recent report of industry body the National Association of Pension Funds (NAPF), one quarter of such schemes are now closed to future contributions as employers struggle to cope with increasing life expectancy and poor investment results.
In a defined contribution scheme the final value of the pension a member receives depends on the performance of that member's individual contributions. This means it is the employee who bears the full risk of the pension losing value. Such schemes are therefore less strictly regulated than defined benefit schemes.
"There is no doubt that the hard-wiring of pension obligations has all but done for the classic defined benefit arrangement, and that defined contribution for all sorts of reasons is expensive and won't deliver the goods," said pensions expert Robin Ellison of Pinsent Masons, the law firm behind Out-Law.com. "There have been calls for a third-way pension, now called 'aspirational' pension, but whatever they are called there is no doubt that there is a demand for such a pension by both employers and employees."
However, he warned that such a scheme must not become burdened by "disproportionate regulation with unintended consequences".
"Steve Webb has generally received a good press for his efforts as pensions minister so far. He should send his 'Sir Humphreys' on a legislation training course to ensure that whatever emerges from this new initiative is subject to balanced regulation," he said.
Last month Webb said that the Department for Work and Pensions (DWP) was planning a dramatic overhaul of workplace pension schemes and would consult on whether to scrap many of the existing rules in the near future.
A spokeswoman for the DWP told Out-Law.com that the comments related to the Government's Red Tape Challenge initiative, under which the public is being allowed to scrutinise over 21,000 active regulations - currently, in relation to company and commercial law. Once each area of the law has been considered ministers will then be asked to look at which regulations should be kept and why, with the default presumption being that burdensome regulation will go.
Industry body the NAPF called on its members to identify irrelevant or outdated aspects of the regime in preparation for the Government's review. The body said that 9 out of 10 respondents to its survey on pensions regulation, published last autumn, had found that the time they were spending dealing with regulation had significantly increased in the last three years. Members called for simpler regulation around member communications, deficit recovery plans, Guaranteed Minimum Pensions and the indexation of pensions for future accrual, it said.
"We have seen around 1,000 new pensions regulations since 1995. With pensions under pressure, this is a very good time to stop and question whether there is regulation which can be cut. It is important to protect people's benefits, but we also need to encourage employers to support pension provision - it is a question of striking the right balance," said policy director Darren Philp.
