Schemes have been left pondering how their benefit structures would be considered under the the government’s latest pensions bill, which codified three types of pension scheme, including “shared risk” schemes.
The bill, published yesterday, distinguishes between scheme types based on the promise made to members during the accumulation stage about the size of their final pension.
If the promise refers to all of the benefits, it will be a “defined benefits” scheme. If it refers to some of the benefits, it will be a “shared risk” or “defined ambition” scheme. And if no promise is made, it is a “defined contributions” scheme.
The argument that future DB accrual can’t be simplified because employers would also like to change their past accrual seems to us to be illogical
Glyn Bradley, Mercer
Though the legislation was presented to provide a vehicle for collective DC schemes and other forms of risk-sharing, experts have said all schemes should consider where they stand under the new definition.
For example, the bill’s explanatory notes state that a scheme which has a normal pension age tied to that of the state is now excluded from the DB camp – such schemes could now be considered risk-sharing.
Proponents of risk-sharing schemes hope the proposals will come into force by the abolition of contracting out in two years’ time, to help any companies looking for an alternative to DB. Matthew Arends, partner at consultancy Aon Hewitt, said: “Employers should now be turning their attention to the wider range of alternatives available from 2016.”
The bill paves the way for CDC by creating the regulatory environment for schemes that pool contributions and only allocate pensions to members when needed.
Danny Wilding, partner at consultancy Barnett Waddingham, said: “The idea would be that for any given level of contributions you would work out what you think on average is a reasonable target benefit that could be paid.”
The scheme would review regularly its ability to meet the target benefits.
Much of the complexity of the prospective legislation centres on this promise, given on “at least some of the retirement benefits” in a shared-risk scheme such as a CDC plan, and either provided by the scheme or a third party.
Importantly, the legislation says trustees or managers of DB schemes “must not obtain a pensions promise from a third party unless conditions specified in the regulations are met”, with possible civil penalties for people that fail to comply.
Other industry experts were left bemoaning the lack of easements to offering DB provision. Glyn Bradley, senior associate at consultancy Mercer, said the government has “snatched away the opportunity of jam today, for the promise of jam tomorrow”.
“The argument that future DB accrual can’t be simplified because employers would also like to change their past accrual seems to us to be illogical,” he said.
