- Major new report suggests adoption of risk-sharing ‘hybrid’ pension schemes could save UK taxpayers billions of pounds without scrapping all defined-benefit (DB) scheme benefits
- Report finds general support among pensions managers for hybrids in the public sector – but not in the private sector
- Ignis today urges the Commission on Public Sector Pensions to examine the use of risk-sharing schemes in the reform of public-sector pensions provision
- Ignis also calls for the government to improve clarity around hybrids – and to create a more favourable environment for the adoption of risk-sharing arrangements
Replacing public-sector final-salary pensions with risk-sharing ‘hybrid’ schemes could save UK taxpayers billions of pounds without reducing employee pension provision down to defined-contribution levels, according to major new research by Ignis Asset Management.
The research – based on in-depth interviews with key public- and private-sector pensions managers, leading policymakers and practitioners, and more than 1,000 employees – suggests that hybrid schemes, in which risk is shared between employers and employees, could offer a compelling solution for public-sector bodies seeking to transition employees away from defined-benefit schemes, without levelling provision all the way down to defined-contribution (DC).
According to many scheme managers interviewed in the report, hybrid schemes would continue to provide an attractive pension – a key recruitment and retention tool in the sector – while also, crucially, reducing long-term costs to the taxpayer. Currently, expenditure on public-service pensions (excluding local government, police and firefighter pensions) exceeds receipts by £4bn annually; this deficit is forecast to double to £8bn by 2013-14 and reach £9.4bn the following year.
The report also reveals that it is unlikely that hybrid schemes could be adopted substantially in the private sector, as a result of the major shift from DB to DC provision that has already taken place. However, Ignis believes the introduction of NEST and the government’s forthcoming consultation on ‘simple’ financial products, could act as prompts for DB schemes to consider the opportunities offered by hybrid schemes.
The report suggests that these opportunities could have greater appeal in the public rather than private sector, in which the increased complexity of hybrid schemes was often cited as a stumbling block for their adoption. With respondent feedback showing that public sector workers are more interested in their schemes and more receptive to pension communications than those in the private sector, public-sector employers could find it easier to explain and communicate the operation of hybrid schemes to potential members.
Commenting on the report, Jonathan Polin, director, Ignis Asset Management, says:
“Workplace pension provision is at a crossroads. Where DB pension schemes have largely been replaced by DC arrangements in the private sector, DB schemes remain dominant in the public realm. With DB deficits running into billions of pounds and the government seeking to reform public sector pension provision, however, it is clear the days of final-salary schemes are numbered.
“We believe that there is potential for the government to develop a middle-ground between DB and DC in the public sector. Risk-sharing or ‘hybrid’ schemes have not, for a number of reasons, taken off in the private sector; but it appears that many pension scheme managers believe that they could offer a genuinely compelling solution for public sector pension provision.
“We urge the government to create an environment in which pension administrators can easily grasp and communicate to others the benefits of risk-sharing. As such we are calling for two things. Firstly, for the Commission on Public Sector Pensions to seriously examine the merits of risk-sharing pension schemes in the future reform of public-sector pensions. Secondly, for the government to review existing legislation to determine whether it is sufficiently conducive to the adoption of such schemes.
“We believe that hybrid schemes offer a convincing solution to the problem of how to reduce the burden on the taxpayer of public-sector pensions while at the same time retaining some of the benefits and certainty that make defined-benefit schemes so important to public-sector employees. It is important the government seizes the mantle on this issue while the opportunity in the public sector is still very much alive.”