Editor's blog: The pensions reform hamster wheel is spinning again and the industry is rushing to see what surprises are hidden in the pensions bill laid before Parliament today.
As promised, the bill clarifies the distinction between three types of scheme structure, and more importantly gives the industry an extra initialism meaningless to ordinary people – "DA" for defined ambition:
Source: Pension Schemes Bill
It also demonstrates the difficulty of hardwiring the 'soft promise' (translation: promise that is not quite a promise) in DA schemes such as collective defined contribution, with a large segment codifying the target returns embedded in these types of schemes.
"As long as they make sure the target benefits are not guaranteed... it is not subject to the scheme funding requirements," explained Danny Wilding, partner at Barnett Waddingham.
As promised, the bill clarifies the distinction between three types of scheme structure, and more importantly gives the industry an extra initialism meaningless to ordinary people – "DA" for defined ambition:
Source: Pension Schemes Bill
It also demonstrates the difficulty of hardwiring the 'soft promise' (translation: promise that is not quite a promise) in DA schemes such as collective defined contribution, with a large segment codifying the target returns embedded in these types of schemes.
It includes such beautiful sentences as:
"A reference in this section to a promise about the level of a retirement benefit... in the case of a benefit the level of which depends on the amount available for the provision of benefits to or in respect of the member and one or more other members collectively, does not include a promise about the factors used to determine what proportion of that amount is available for the provision of the particular benefit."
Explain that one down the pub.
It all comes down to how the schemes will be regulated. "As long as they make sure the target benefits are not guaranteed... it is not subject to the scheme funding requirements," explained Danny Wilding, partner at Barnett Waddingham.
How these target benefits are structured and communicated will be crucial to this reform being seen as a success or failure. A linked segment focuses on promises made by a third party, including the prospect of civil penalties for those that fail to comply with the regulations:
The bill also gives a power to prevent transfer from public service DB schemes, except to other DB schemes.
How the industry has responded
It is fair to say the early reaction has been mixed, generally along the faultlines of agreeing with or disagreeing with CDC.
But Glyn Bradley, senior associate at Mercer, said the proposals offer no help to employers currently offering DB pensions, and 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.
"Unfortunately, rather than meeting employers' immediate needs, the government grocer has decided to provide us with tools it thinks employers might be able to use to meet an entirely different need, providing DA schemes, that they didn’t even know they had, because they are already deciding to provide DC schemes."
Wilding welcomed the range of risk-sharing options created, predicting the first schemes created will use just a small amount of the potential pooling to achieve cost savings.
"By pooling with other members they could get access to a wider range of investment strategies themselves," he said.
Unfortunately, you get a sense that the policymaker's eye had moved on from saving old-style DB a while ago. And as someone that has previously written on the potential benefits of CDC, the greater choice available to employers for those employees willing to pool is welcome.
But it is hard to be wowed by the government's figure on potential uptake:
@iankmsmith "may" is not exactly barricading the boulevards, is it?
— Will Aitken (@WillJAitken) June 26, 2014We'll keep picking through the documents. There will be a fuller analysis of the bill in Monday's Pensions Expert.
