The past few years have seen a shift away from final salary schemes, offering a hard and fast income guarantee, to the opposite extreme. Employers who found they could no longer afford to maintain defined benefit schemes only had one way to go – the result being that defined contribution now dominates the market.
It is now commonplace for workers to be enrolled into schemes where they have their own pension pot, and where they shoulder the entire investment risk. And at retirement these people have, largely, been forced to crystallise into an annuity, no matter what the market conditions. It’s little wonder that so many have simply chosen not to save for their retirement.
This is why this bill is so crucial. We have already acted to create a strong base for people to save for retirement. The new state pension will provide a bedrock that people will be able to use as a foundation for additional saving. The introduction of auto-enrolment has seen over 3m workers brought into workplace pensions. And a cap on charges on default funds in defined contribution schemes will do more to ensure fairness and good value.
Our new Pensions Bill will build on these reforms. We want to encourage defined ambition schemes, to give businesses and workers new options to pool risk, reduce volatility and provide the chance of better outcomes. Current rules mean this often just cannot happen, so it is important we open up the market to provide a midway between defined benefit and defined contribution – a compromise between all the risk resting on the shoulders of either the business or the individual.
These new options may not be right for all firms and employees, as some of my detractors have been quick to point out. But that’s not the point. Why should the fact that they won’t suit everyone prevent us from legislating to ensure that defined ambition pensions can exist and bring benefit to many?
Another option we want to encourage is collective pension schemes, where through the pooling of risks, we can deliver better outcomes for savers. The scale of collective schemes will provide more stability and security for savers. I want to see large schemes that invest for the long term, and spread risks to create the opportunity for a bigger pension.
These types of schemes work well around the world, and we think UK workers should have them as an option. But let me set another misconception straight: we are not planning to import Dutch or Canadian models lock, stock and barrel. We must learn from the best international practices and ensure that what we bring best matches the demands of UK business and workers. Crucially, this also means that the pooling of risk will still be compatible with the changes announced in the Budget – to give people greater control over their pension pots to use them as they see best.
Our pension reforms will create a fairer society, making sure pensions are strong once more in Britain – and I am proud to be the minister responsible for seeing them come into law.
Steve Webb is minister for pensions.