As the fallout from Carillion’s collapse continues, there’s been an outbreak of renewed calls for tougher sanctions against company directors who deliberately underfund their pension schemes, while paying dividends to shareholders and large bonuses to themselves.
There are also calls for the Pensions Regulator to have more teeth.
But is that the right focus? Dishing out fines to directors of failed companies will hardly improve the benefits that their former employees receive.
Instead of being suddenly wise after the event, politicians should commission research that explains why, despite widespread closures of defined benefit schemes and hundreds of billions of pounds in contributions over the past decade, the UK’s defined benefit schemes still have a huge overall deficit.
Members of Carillion’s defined benefit schemes will have their benefits protected via the Pension Protection Fund. But policies should be in place so that future pensioners are not reliant on this fund kicking in to ensure their comfort in later life.
As the defined benefit white paper receives its finishing touches, there are certain policies that need to take priority as the government looks ahead to this year’s long-term care consultation, and maps out the future direction of auto-enrolment for the 2019 review.
To begin with, the white paper should clarify which index should be used to calculate increases for defined benefit schemes.
As it stands, the playing field is not level, with some schemes gaining a windfall in 2010 when the government changed the statutory measurement to the consumer price index.
Others continue to work to the higher retail price index because of the wording of their rules, whether that was the deliberate intention or not. The issue has already generated some high-profile court cases. But the time has come for the government to clarify its position once and for all.
Pensions are too complex. A plain vanilla defined benefit scheme established in the 1970s will have more than 10 different tranches of benefit to administer. The typical scheme will have even more.
The government should introduce a mechanism for schemes to simplify their legacy benefit designs into a single standard structure. That would not only enable more cost-effective and efficient administration of schemes, but it would make it easier for members of schemes to understand their benefits.
In the 2017 auto-enrolment review, the government made a useful start by lowering the age when contributions commence. It should now go further by lowering the starting age to 16 (aligned with national insurance).
If people are enrolled automatically in pensions from the day they start work, they become accustomed to the concept.
Pressure should be eased on employers who struggle to fund their defined benefit schemes. This will help make room for additional payments to defined contribution schemes.
We need a tax system that is less convoluted, so people can see the benefits of saving more clearly. Simpler benefits are more easily understood on a dashboard – another project that needs to make a success.
But it’s crucial that the government tackles all of these issues in a joined-up and measured way.
Ultimately, the government needs to lay the groundwork for a system that produces better outcomes for both current and future pensioners.