The Department for Work and Pensions has published the Pension Schemes Bill 2014 and a response to the recent consultation on the Government’s defined ambition proposals. Steve Webb, the pensions minister, has stated that he wants to facilitate greater risk sharing in pension saving, meeting the needs of businesses and individuals.
The Bill addresses various matters, including the introduction of new statutory definitions of categories of UK pension schemes, and a new legislative framework enabling the creation of schemes that will provide collective benefits (collective defined contribution schemes, or CDC).
What are the new definitions?
Instead of money purchase and final salary, the Bill introduces three categories of scheme: defined benefit, shared risk and defined contribution.
Defined Benefit (DB) schemes will provide a retirement income from normal pension age (NPA) for life, they will provide a “full pensions promise” and will have a fixed NPA.
Shared risk will describe schemes where there is a pension promise in respect of some the retirement benefits, but there is not a guarantee in respect of all the benefits, as there is in a DB scheme. Cash balance schemes will come under this definition. When it is introduced, CDC will also come under this heading.
Defined Contribution (DC) will be a scheme where there is no pension promise in relation to any of the retirement benefits for members. This will cover self-annuitising schemes and CDC schemes which don’t provide a promise or guarantee while benefits are being built up.
What is a ‘pension promise’?
This is set out in general terms in the Bill; it exists if there is a promise, at a time before the benefit comes into payment, about the level of the benefit. A ‘full pensions promise’ means there is a promise about the level of benefit and the level of benefit is determined wholly by reference to that promise in all circumstances. The Bill gives some details about the nature of a promise, but we expect that there will be some debate among professionals over the exact nature of a promise.
How will the new definitions change the status quo?
Broadly, DB and DC will mean the same as they do currently. The change is in the introduction of shared risk, enabling the introduction of CDC schemes, where assets will be pooled and the investment risk will be shared between members. As a result of its consultation, the Government appears to recognise that DB provision is in decline because of the associated cost and uncertainty for employers. However it is reluctant to allow pensions provision to become entirely DC in nature (as we currently understand the term); it feels that sharing the investment risk and retaining some sort of guarantee will encourage pension saving and enable employers to make provision for their employees which is better than standard DC saving.
When the Government introduced the concept of defined ambition, it suggested that it could look like a version of DB with fewer obligations on pension schemes in terms of the guarantees they provided. The responses to the consultation made it clear that a loosening of the restrictions on DB schemes would only be regarded as beneficial to employers if they took effect retrospectively. The Government has made it clear that this is not an option, so it seems as though the middle ground which the Government describes as “defined ambition” will occupy a space which is much nearer DC than DB.
Will shared risk be the choice of the future generation?
The Government states in its response to the consultation that in approaching the regulation of pension provision, it seeks to give individuals more freedom about how and when they draw down their pensions (hence the recent Budget announcements), but recognises that a significant proportion of people want more certainty about their pension savings and income – hence the desire to introduce shared risk. There appears to be enthusiasm in principle for CDC schemes and increased risk sharing. In practice, its success will depend on whether employers sign up to CDC schemes in sufficient numbers. The concept works in other countries, but sharing risk is a new concept in UK pensions. It is unclear at this stage whether the positivity from the industry and employer groups about CDC will translate to employers choosing to offer pension provision to their employees where the risk is shared, rather than simply offering them access to a standard DC scheme. Steve Webb’s aims are laudable, but the lack of a perceived need for change may mean that DC will be more attractive than CDC to the employers of the future generation.
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 ‘Reshaping workplace pensions for future generations’ ran from 7 November to 19 December 2013: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/255541/reshaping-workplace-pensions-for-future-generations.pdf