The recent deal with Sir Philip Green over the BHS pension fund has highlighted the role of the Pensions Regulator and the importance of a strong independent power in the sector.
However, what we’re seeing is far from a pensions crisis. Saving is on the up, reversing a trend of people saving less despite living longer.
But when it comes to “final salary” pensions we can’t rest on our laurels
Despite these types of schemes representing a declining proportion of savers, 11 million people still have all or some of their retirement income tied up in them, and we need to ensure that their future is secure.
And crucially, we need to make sure that people have confidence in their savings. When many of these schemes were set up, Britain was a completely different place. The economy has now changed beyond recognition, life expectancy is significantly longer and people move jobs more often.
We recently launched a green paper asking for views and suggestions on measures to help secure the future of final salary pensions. Alongside the powers of the regulator I’m also aware that we need to look at the security of some of the smaller “defined benefit” (also called final salary) schemes.
Smaller schemes may lack opportunities to access sophisticated advice and investment strategies; they are more vulnerable to the markets; and, as member numbers diminish, they could become less sustainable.
An option I’m keen to consider is that of the “super fund” for small schemes and how they might come together to provide better value to members and, crucially, a greater level of security
Another question we are asking is around indexation and whether schemes should be able to change the way they increase pension payments – from in line with the RPI to the CPI.
Providing increases is a big cost to final salary schemes, but is also an important element of the security they provide to pensioners in retirement. The CPI has already replaced the RPI for the pensions of civil servants, the military, teachers, NHS staff and MPs.
Some private pension schemes have also been able to make the switch.
But many have RPI written into their scheme rules. At the time many of these schemes were drawn up, the intention of trustees was to protect pensioners from inflation, not to lock them into one particular measure.
And if using a modern and more accurate measure which still protects pensioners against rising prices also makes the scheme more sustainable in the long term, it is worthy of consideration.
Inflation isn’t the only thing that’s changed since final salary pensions first became popular. Investment markets have also become more complex and more globalised. It’s in that context that trustees have to make critical decisions and seek the right balance between risks and rewards.
That’s why we also think it is important to have a debate about whether more can be done to support effective decision making and to get the very best outcomes from these schemes – for members, for sponsors, and for the economy as a whole.
I have a very clear set of criteria in mind when it comes to the future of the defined benefit sector.
Any changes must balance the needs of consumers, employers and schemes and I don’t want to see it tipped in favour of one particular group.
Richard Harrington MP is the minister for pensions