Yesterday, The Department for Work and Pensions (DWP) published a Green Paper entitled ‘Security and sustainability in Defined Benefit Pension Schemes’. The Paper focusses the discussion on four key areas of private sector DB schemes. These are listed below with our brief, initial views:
Funding and investment – Our View: trustees face a difficult task balancing risk and return. They should not be cavalier – but neither should an unduly prudent strategy make the threat of insolvency a self-fulfilling prophesy. The ability to pool risk is what makes DB provision attractive.
Scheme affordability – Our View: inflation can ravage spending power and protection, per se, is a good thing. But the starting level pension is of equal if not greater significance. Repeated legislation has made expensive schemes even more expensive. The system of discretionary increases with best endeavours seemed to work well in the past.
Member protection – Our View: recent pension tragedies suggest that more can be done. There must be a way of TPR and DTI raising their game without throwing too much sand into the wheels of corporate Britain.
Consolidation – Our View: scale can be a good thing. On the other hand, a lack of competition is not; neither is the dilution of flexibility.
A green paper by definition is intended to ‘provoke discussion’ and there is little doubt that, judging by the initial headlines in the ‘mainstream media’, this will largely be achieved.
But are these frank discussions going to descend into a shouting match? The headline grabber from the paper is the discussion on suspending indexation for underfunded schemes. These are some of the major quotes since yesterday:
GMB Union National Officer – “This green paper once again reveals the true face of the Tories: best chums with their business cronies but happy to take cash from the pockets of ordinary working people.”
BBC headline – “Firms could reduce pension generosity”
Steve Webb, former Pensions Minister – “There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards.”
The fear is that, if stakeholders within the industry take entrenched positions leading to a polarised debate, the chance of any practical ideas forming part of the White Paper are slim.
Neil Carberry, CBI Director of People and Skills said “The Green Paper is a sensible start to what is a complex conversation”.
Our View: This paper is exactly that, a ‘sensible start’, and by its very nature the Green Paper has been published in order to explore solutions for an industry that has been much maligned and to offer up potential solutions to large number of employers who have been struggling to meet the rising cost of defined benefit pension provision.
We have to start somewhere.
More technical detail on the Green Paper will appear soon as a website article.