How occupational pension schemes can thrive as retirement benefit schemes

About two weeks ago I received a reminder in my inbox to select my employment benefits for the next year. I am now heading towards the longer-serving end of the workforce, so it is a comfort to me to have the ability to select certain options such as critical illness cover just in case. I also always have a quick look at the wide range of options that seem to cater for a myriad range of lifestyles and needs. While doing this it struck me that the pensioners in the schemes we look after have none of that.

Anyone retiring from a defined contribution (DC) scheme just has their pot of money to spend. Due to circumstances, some may need to allocate part to illness cover in which case they need to go out, alone, and find the best individual cover they can afford. Others may need to hope that after the drawdown there is enough left over in late life to supplement what support they may be eligible for from the government to ideally find decent care close to their family. Arguably for a defined benefit (DB) member, it may be more restrictive having to save up a bit of each month’s pension for later care.

A new opportunity

We now have a new Government in the UK for the first time in 14 years and one that has committed to a review of the pensions landscape to improve retirement security. With careful design, we could radically change the situation above and support the government’s aims of better outcomes for pensioners. A vision of this is where an evolved occupational retirement benefits scheme could in the future provide:

• A small, minimum level of DB pension to supplement the state pension and support a targeted minimum level of comfort in retirement; plus
• A cash balance element that gives each employee certainty on their pot in retirement to help them plan; plus
• Access to pooled medical benefits after retirement; plus
• Pooled long-term care cover.

And, what if a retirement benefit scheme could provide all that for the equivalent cost of a good DC scheme?

Why might employers do this, and do they need to do all of it?

There is no escaping that the UK workforce is going through change. We face challenges in attracting and retaining younger employees and need to support an aging workforce. Providing improved retirement security can be a key part of attracting and retaining staff.

Such schemes can also be a long-term source of surplus. With the right balance of stewardship and risk management from the start, occupational schemes can deliver surplus for employers and members, helping to control the ultimate cost.

We have seen some interest in this already. For schemes already in surplus several employers have asked us whether they can use that to provide wider benefits such as healthcare only to find out that is not permitted under current rules.

There is no denying there will be considerable caution and even resistance to going back into any form of defined benefits. The extent to which employers may be willing to provide such benefits to attract the best employees will of course reflect industry, risk appetite and affordability. Importantly, with proper design, it does not necessarily require that employers take on all the risk too. A simple cash balance scheme can still have a mandatory long-term care benefit where risk is pooled among all members and paid for from each member’s cash balance at retirement. This risk could even be consolidated across multiple pension schemes along with pooled investment by those schemes in UK long-term care providers and UK medical science and research organisations.

Ultimately, the possibility is imperative to explore as there is real opportunity to improve the financial wellbeing of pension members and employees. Initial investigations indicate that collectively saving for long-term care has the potential to reduce the cost to less than 10% of what it would be if paying for care on your own.

Change we need from the government.

Achieving the above would require radical but not impossible changes from the government on pension regulations. The changes we would need are to:

• Allow occupational schemes to provide a wider range of post-retirement benefits.
• Remove all minimum requirements for new DB pensions (e.g. pension increases) to allow schemes to offer a minimum safety net.
• Evolve funding and investment rules to allow appropriate approaches to different benefits.
• Get on with introducing surplus rules to allow employers to extract surplus (as an incentive for setting up such plans) and allow surplus to be used for broader benefits now so practice can be established and evolve.
• Introduce tax incentives for employers to set up retirement benefit schemes.
• Allow a safe haven for savings and retirement guidance given by trustees and employers to members of their occupational pension schemes (with appropriate moral hazard safeguards).

Supporting government’s manifesto promises

Expanding the role of occupational pension schemes can help meet a number of the new Labour Government’s manifesto objectives:

• It can help support an improvement in pension outcomes and retirement security by allowing pooling of risk for health and care which would otherwise significantly impact retirement savings and income.
• Where properly communicated it can become an important recruitment and retention tool for employers, expanding and extending DB occupational schemes and facilitating more investment in UK markets.
• It may facilitate investment by occupational schemes in care and medical infrastructure again supporting investment in the UK.
• As a consequence of the above, it could help to some extent alleviate pressures on the NHS supporting its long-term success.
• It can help advance the consolidation of occupational pension schemes driven by the broader benefit of pooling risk.

This may all seem incredibly difficult and a major shift in the role of occupational retirement provision. But as a nation, we face big challenges in health provision and retirement security in the UK and that demands that we think big when looking for solutions.