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Defined Pensions – as easy as ABC

So we have DB and DC – why not DA?

Ambition (n) – an eager or strong desire to achieve something, such as fame or power. The object or goal desired.

Steve Webb’s definition – ambition (v). “We are aiming for a pension of this sort, it will be in this range, we can’t give you an absolute guarantee but this is how we are going to get this pension. And we will report back on how we are doing and we might have to tweak but this is what we are aiming for.”

It feels more like a “doing word” in Steve’s version.

I think the idea of sharing risk between employer and employee is a good idea, but wonder how it will be implemented? I feels like DA will cost more, and give no additional certainty. There will just be too many get out of jail free cards. The caveats will be long and water tight.

DC pensions all set expectations, the variables under DA don’t really change. You can’t have half a guarantee. So what changes? What would have happened if we had DA 15 or 20 years ago?

The challenge must be not to tinker and legislate but to educate. £100,000 is a lot of money for most people. So when they have a pensions pot that size then they think they have enough. They don’t do the simple arithmetic, they don’t really understand the buying power of increased inflation and reduced annuity rates.

Compulsion will come, and it needs to. But with it some education. Education around small starts (not always showing the big gaps). Education around risk. Education around income options. Education around buying power, inflation. It’s not simple but advisers do this every day. Finding a way to get that knowledge to the mass has to be the way to improve things.

Helping people define their own ambition feels like a smart way to deal with the problem. I fear creating rules around DA will simply lead us back to industry profits, consumer disappointment and another pension version of endowment review.

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