The creation of a ‘Pensions Pound’ could lead to “radical simplification” of defined benefit pension rights, the Association of Consulting Actuaries (ACA) and Royal London have suggested.
In a joint paper Simplifying pension benefits – is it time for the Pensions Pound? published today, 19 November, the pair suggested that as well as being simpler to understand, scheme running costs could be reduced by up to 50 per cent, while DB consolidation would be “much simpler”.
Under the proposal, an individual’s pension rights would be converted into a pension pound, which would then be converted back into a set of standardised rights, common across all schemes.
Traditionally, a pension figure can be made up from a “dozen” different slices, which all have different rules dependent on how the pension was earned, how it interacts with the state pension system and gender equality rules.
Royal London director of policy, Steve Webb, said: “There has been talk of pension simplification for years, but defined benefit pension rights remain one of the most complex areas of the pensions landscape.
“This would mean less money was spent running schemes and explaining complexity and could pave the way for greater understanding and better value for money. This should be part of the government’s forward agenda.”
The paper also argues that transferring out of schemes would be easier, while individuals would also be able to compare the rights under DC, DB and state pension systems.
Furthermore, members could reshape all of their non-state pension rights into a different mix of DB and DC rights.
The paper does note that current legislation allows for “some” reshaping of pensions benefits, but that further legislation “would be needed to make sure that members were treated fairly” and also account for any knock-on effects from pension tax relief restructuring.
ACA chair, Jenny Condron, added: “DB pension rights have built up in a piecemeal way over a period of decades. This makes them expensive to administer and complex for members to understand.
“Converting DB rights to a standard structure could yield huge savings and be to the benefit of schemes, employers and members alike.”
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