For much of the twentieth century, private or workplace pensions meant defined benefit.
At 60 or 65, you could expect to receive a gold watch, a handshake and a guaranteed income when you retired.
But the world has changed.
Defined benefit (DB) pensions
People are now living longer. In 1951 life expectancy for a man was 66. In 2011 it was 79. This was one of the factors that made DB pensions more expensive to provide.
And thanks to automatic enrolment, more people are actively saving for their retirements than ever before – with authorised defined contribution master trusts providing secure, efficient savings vehicles.
So, DB schemes continue to close, and many are now facing the prospect of how they fund the finite promises for their ageing membership. As the Department for Work and Pensions (DWP) recognised in their White Paper, the landscape is maturing, and we need to consider whether we are well set up for this next phase of pension provision.
The industry is reacting to the change in the landscape and that is why I want to focus on encouraging those in the industry that are looking to provide new or innovative solutions in the DB area to come and talk to us. The earlier we all get together the better. As we must ensure that we are all focussed on how we can continue to protect the savers who have a DB pension.
We know that the market is evolving and developing in this area to try and meet the different needs of schemes and sponsoring employers. This includes those schemes that are in specific or difficult circumstances, such as those expecting to leave the Pension Protection Fund (PPF) assessment process.
The first of our DB funding code consultations opens in early March. In it, we’ll be setting out options for a clearer funding standard and talking to schemes about how to manage their long-term objectives. This will put more onus on schemes to assess all their options and pursue strategies that are suitable for their circumstances.
Protecting savers must be at our core
Increasingly the market is looking at other types of vehicles to move into, for example DB superfunds. We can see that there could be benefits to this for some schemes.
But protecting savers must be at our core, and we expect trustees to think very carefully about whether this is in their members’ best interests.
We have already set out our expectations of DB superfunds that intend to operate before any authorisation regime is put in place. And we will be assessing whether these schemes or superfunds are appropriately protecting savers transferring into them.
What we want to know
We welcome innovation in the market. As I’ve said, we want to work with industry at earlier stages of development to ensure efficient and effective use of resource.
Through our horizon scanning work we know that advisory firms and providers are beginning to explore and promote novel business models. These include:
- various structures to consolidate benefits (including superfunds)
- increasing scale and sharing risk
- solutions for schemes where there is no substantive business attached or there is a risk of insolvency
We need to know how existing and emerging models will offer increased protection to members and improve the likelihood that they will receive their expected benefits.
Get in touch
We want to hear from all industry innovators that fit into any of these categories so we can understand these models and support innovation in the market where it can improve outcomes for savers.
Please email DBInnovation@tpr.gov.uk to get in touch with our dedicated team.
The world has changed. And as ever, so will pensions.
By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice