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Living Pension: achieving financial inclusion

Living Pension: achieving financial inclusion

The principles underpinning the “Living Wage” might be translated across to a “Living Pension” benefit design which would provide a minimum level of retirement income and a more sustainable basis for long term defined benefit provision. Paul Moffatt, Senior Manager at KPMG, discusses why this design might be more inclusive than the status quo and explains the impact on the risks being taken by members and employers.


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Many employers agree that they can attract and develop the diverse range of people and skills they need only if they have an inclusive culture. Many Local authorities have an “Inclusive Growth” agenda in order to ensure that minority communities and the less well-off are able to benefit from economic growth. However, current pension provision often has a high cost of entry for members and arguably excludes several groups from benefit provision. These groups include:

  • Young people who need to save for other things;
  • Less well-off people who can’t afford contributions, e.g. single parents who may be more likely to work part time;
  • Individuals who have high levels of personal debt;
  • Senior people who are now affected by pensions tax allowances. 

The status quo of defined benefit provision, and some forms of defined contribution provision, often don’t work for these groups.

The risk pendulum

Very often when the closure of a defined benefit scheme is discussed we see a proposal to move from a relatively generous defined benefit to a lower cost defined contribution benefit. Sometimes this is unavoidable, but it means the risk pendulum swings all the way from employers underwriting all risks, the main ones being investment and mortality, to members taking on all risks. Those least able to take risks are the low paid, as the outcomes are so uncertain. Depending on the level of contributions, some members will run out of money and others will die before they have spent their accumulated pots, which seems like an inefficient use of an employer’s reward spend.

Some employers choose a lower risk defined benefit option such as a Career Average Revalued Earnings (CARE) scheme with a lower accrual rate or even a cash balance arrangement. Usually these will still have a significant employee contribution and therefore still suffer from the same problems as the original, more generous defined benefit scheme in terms of inclusivity.  Some low paid staff may not join the scheme and for others who do, the scheme may overprovide. This has wider implications as these members might be better off with a lower pension benefit and more cash now, which could benefit the economy and increase financial inclusion. 

In addition, a cash balance scheme is effectively a defined contribution scheme post-retirement, which means that members are still at risk of living too long or not long enough. And the employer may also be continuing to take a significant amount of investment risk pre-retirement.

What are the alternatives?

An alternative which has been discussed recently in the pensions press is the “Dutch style” Collective Defined Contribution (CDC) scheme. Such schemes solve many of the problems outlined above by pooling the investment and mortality risks, which means that members who die early subsidise those who live “too long”. Yet, it goes without saying that the Dutch design also faces a number of challenges.  

My view is that we must embrace a design with a much less generous defined benefit element. A more inclusive benefit would be a non-contributory defined benefit aiming to provide a “Living Pension” with all (modest) risks underwritten by the employer, in addition to a CDC scheme where members and employers pool resources, and members pool risks. This could lead to a degree of levelling up from lower cost defined contribution, which could mean fairer outcomes for many people. Surely this would be more sustainable in the long term and lead to better financial inclusion.

For further information, please contact Paul Moffatt

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