Webb on why his pension reforms have real bite

Pension minister Steve Webb’s vision for pension reform seemed a hollow narrative until last week.

“Hamlet without the prince,” Labour peer Baroness Hollis had lamented. But what a difference a Budget makes. Last week Webb introduced his star character onto the public stage with the publication of his long-anticipated Green Paper on state pension reform.

The paper – A state pension for the 21st century – had been mooted since last October. Its 55 pages could become a 21st century testament to the chutzpah of a coalition in the first flush of power – or a mere footnote in pensions’ tortured history of reforms.

With pensions currently in flux due to a barrage of policy changes, the new savings landscape still lacks a clear narrative. But setting out his vision for reform to PP, Webb says the introduction of auto-enrolment next year had been the key driver in the need to reform the state pension now.

“With auto-enrolment coming up and with millions and millions of people making a decision about whether to stay enrolled, we’ve absolutely got to make sure it pays to save and people are confident enough to stay enrolled”, he says.

“The issue in the past was that if the floor was £5,000, people would think if they saved it could get means-tested away. If we can set the floor above the guarantee credit, above the means test, then they have much greater confidence that with their contributions, the employer contribution and the tax relief, they will be clearly better off if they save. We think this will give a real boost to saving incentives.”

Webb has put forward two options for reform – an incremental move to a two-tier system maintaining state second pension, or a big bang revolution moving to a single tier flat-rate pension of £140.

The Department for Work and Pensions stresses there are pros and cons to each. But it is option two – the single tier £140 system – that would hit workplace pensions the most. It would mean the end of contracting-out, and with it an increase in sponsor costs to keep defined benefit schemes open.

Yet the government makes the point that while sponsors of contracted-out schemes would lose the rebate, the legislative requirement for schemes to provide a certain level of benefits would no longer apply. But what exactly does this mean?

“A scheme could just carry on what it was doing”, Webb says, “or it could say, ‘our scheme members are going to get bigger state pension rights now, so we will reduce the accrual rate in our scheme to offset the loss of the rebate’.”

He adds: “But there’s a reason why there’s been a long-term trend of closures. The factors that have led many of them close – like longevity and funding volatility – are common to the schemes that are open, and yet the schemes that have stayed open have stayed open for a reason.

“Often an employer has taken a call that a decent salary-related pension is a good thing to give to their employees, and that won’t change in this new world. They’ll be able to restructure it a bit but they may still think this is a good thing to recruit and retain staff. There are still good reasons to run these schemes if people want to do that.”