Tuesday, 24 April 2018

    Defining our ambitions

    Steve Webb must now define his ideas or risk being overwhelmed by their sheer volume and disparity

    The decline of defined benefit has opened a floodgate of new ideas for creating a UK pensions paradise, some more realistic than others. With the pensions minister leading the charge, the industry is redefining its ambitions for a lasting pensions system.

    The way he describes it, Steve Webb’s office is a think tank, full of businesses, industry bodies and lobby groups – as well as its fair share of impassioned individuals. He is clearly absorbing input from all sides, which is to be applauded. But this creative and democratic approach may stumble when it comes to turning ideas into coherent regulation.

    This month alone, Webb has proposed a slew of new ideas. One is ‘DB-lite’, a pension scheme that is effectively defined benefit while an employee works for a company. The pension converts to defined contribution when the employee leaves the business.

    “The department’s quite tired of my exciting ideas!”

    Second, Webb would ideally like to preserve capital guarantees for DC savers – a contradiction in terms, you might think, given the point of DC is that the individual saver shoulders the risk instead of their pension scheme’s sponsor. Nevertheless, the minister proposed a Pension Protection Fund for DC savers at a conference hosted by Dimensional this month.

    “The department’s quite tired of my exciting ideas!” Webb joked, having sent a roomful of pensions luminaries into a spin after dropping these ideas into his conference speech in quick-fire succession.

    As yet, there is no clear indication of how these ideas would work in practice - and how to preserve regulatory continuity once Webb has left office.

    “We’re looking for creative ideas,” Webb said. He briefly outlined two related concepts the ministry is exploring to make pensions regulation more consistent.

    The first is time limited exposure to regulatory risk. “Once you’re out the door, a future pensions minister can do what the hell they like because you’re not exposed to the risk of what they do.”

    The second concept is a “firebreak” idea. “The argument is that you say here’s the regulatory regime, but it’s a regime [where] as soon as it changes substantively, you’re off the hook,” Webb said.

    These ideas must be developed, but it is heartening that ways to ensure better political continuity are being discussed.

    Steve Webb

    Steve Webb

    A second difficulty is that although Webb has committed to releasing a consultation paper on defined ambition by the end of this year, the industry remains divided on what defined ambition should look like – and if it should even exist.

    High profile consultant John Ralfe is one DA sceptic. He argues a hybrid system is not the answer. “As far as I’m concerned, there is DB at one extreme and DC on the other. There is nothing in between. I do not believe… there is a proper ‘third way’ with a DB and DC hybrid.”

    For a subject some dismiss as arcane, pensions has a remarkable tendency to inspire strong opposing views. Webb should be applauded for listening to these views, but he cannot please all people.

    Webb must publish his ideas for defined ambition soon or risk being overwhelmed by their sheer volume and disparity. His long-promised paper cannot come soon enough.

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