Steve Webb indicated last week that the Government is going to examine risk-sharing. Risk-sharing is the shorthand for the pensions landscape between defined benefit and defined contribution schemes, where risk can be shared between employers and members, or between members, and it can exist in a range of forms, many of which are already possible and in existence in the UK.
“once we’ve gone from the DB extreme where the employer shoulders all the risk, to the DC extreme where it’s all borne by the member, hopefully we can push it back a little bit.”
We know that occupational pensions and coverage in the private sector has – unfortunately – declined. The closure of DB schemes to new members and to future accrual for existing members continues to be seen. And all too frequently good quality DB schemes are being replaced by less generous DC schemes where all the risk is placed on members. The average employer contribution rate for DB occupational schemes is now 16.6%, compared with 6.1% for DC. And by 2010 only 39% of male employees and 28% cent of female employees belonged to an employer-sponsored pension scheme in the private sector, compared with 52% and 37% respectively in 1997.
The coalition agreement said
“We will simplify the rules and regulations relating to pensions to help reinvigorate occupational pensions, encouraging companies to offer high-quality pensions to all employees”
DB schemes provide the most secure pension provision for scheme members. But a middle-ground between employers closing to DB and moving to pure DC (where all the risk is placed on members) would be welcome. The key question is what the Government actually does to stimulate risk-sharing and encourage occupational pensions.
The TUC has always accepted the case for a regulatory regime for occupational pensions that makes schemes easier to run. However, we are not persuaded that the level or extent of regulation has been a major cause of the problems with DB schemes, or the move from DB to DC schemes. We do not want to see a lightening of regulation that will result in employers reducing members’ pension benefits or the closure of DB schemes – reducing regulation under the guise of increasing risk-sharing could simply act to further reduce pensions provision rather than improve it.
So, in examining risk-sharing the Minister should be guided by three questions: Will it encourage employer engagement in good quality pension schemes? Will it produce pensions at adequate levels? What control and protection will scheme members have within any envisaged new schemes? We await with interest further details of what the Minister intends to do.