Pensions minister Richard Harrington has told New Model Adviser® he is ‘hopeful’ the defined benefit (DB) green paper will lead to a system which can avoid cases like BHS.
Earlier today the Department for Work and Pensions (DWP) released a green paper on DB schemes which addressed the pressing concerns which the system faces.
The paper said that in cases where employers are in difficulty there could be the ‘case to suspend indexation’ and that moving to a ‘level playing field’ on indexation between Retail Price Indexation (RPI) and Consumer Price Indexation (CPI) is something that should be considered.
Speaking with New Model Adviser® following the publication of the paper, Harrington (pictured) said the long-term goal of the work would be to make for a more robust system which can deal with cases such as BHS, where the collapsed retailer's pension scheme has a deficit of £571 million.
‘I am hoping that the end-product of the green paper will mean changes to the system to ensure that it can cope with whatever is thrown at it,’ he said. ‘That may mean cases like BHS, it may mean different inflation environments [or] different employer takeovers and mergers.’
Harrington also stressed the current framework of DB schemes are not in mortal danger.
‘The main thing I wanted to show in the green paper is we don’t believe there is a systemic crisis. Some of the tabloids want us to believe that disaster is everywhere and that is clearly not the case. [But] that does not mean things don’t need changing in an evolutionary way,' he said.
Harrington also emphasised the need for more consolidation, an issue which was addressed in the paper through the concept of the superfund.
This superfund would see multiple employers join together to cut costs, although it concluded that such a system should be voluntary and not run by the government.
‘One of the main things I think is interesting is do with consolidation. It is very clear to me there are too many small schemes, they are very expensive and they can’t invest in alternative investments which have higher returns.’
Which shade of green?
On specific issues Harrington was not drawn into expressing his opinion as he said it is a green paper which needs to consider responses from the industry before conclusions are made in the subsequent white paper.
However the document has attracted criticism from some, with former pensions minister, now Royal London director of policy, Steve Webb describing it as ‘one of the greenest green papers in living memory’.
‘Despite months of public debate led by the [Work and Pensions] Select Committee and the pensions industry, the government’s own thinking does not seem to have advanced significantly. Given the years that can elapse between floating ideas in a green paper and implementing them on the ground, the lack of firm proposals is disappointing,’ the director of policy at Royal London said.
Despite the minister’s hopefulness, Webb was also sceptical the proposals could stop future case like BHS.
‘Even in the area of trying to avoid a repeat of the BHS fiasco, the green paper is remarkably timid on the idea of giving the regulator more power to challenge takeovers which could damage a pension scheme,’ he said.
Tom Selby, senior analyst at AJ Bell, said the BHS case is critical to the paper but suggested the government is keen not to generate negative headlines over member cuts.
‘Clearly the case of BHS and Philip Green looms large here, but equally ministers will be concerned about generating headlines suggesting accrued rights are under threat. Pension promises already built up have historically been sacrosanct, so even a seemingly innocuous reduction in benefits could be viewed as the thin end of the wedge and stir up controversy,’ he said.
‘As such the green paper published today avoids setting any firm direction of travel, and instead attempts to set the scene of what is likely to be a fierce debate on the future of DB pensions.'