The government is claiming widespread public support for its defined ambition proposals, included in the pensions bill published today, but industry appetite remains mixed.
Research published by the Department for Work and Pensions shows that 28 per cent of employers said they would be interested in offering an alternative pension, where the risk is shared between the employer and employee.
But the Society of Pensions Consultants has questioned the validity of the consultation given the responses were filed before the Chancellor unveiled the freedom and choice agenda that will give all members the ability to access their pots from age 55. Had this policy been known at the time stakeholders were preparing their consultation responses, they would have been quite different says the SPC.
The Association of Consulting Actuaries says the government has missed an opportunity by not permitting more flexibility in defined benefit schemes, given that many companies offering them are reviewing their arrangements in the run up to the end of contracting out in 2016.
Pensions minister Steve Webb says: “Up to now, employers which have closed down their defined benefit schemes have often moved to a defined contribution scheme in which the entire investment risk falls on the saver.
“The purpose of the new legislation will be to enable employers to develop shared risk – or defined ambition – schemes which offer more certain outcomes for their workers, while still keeping costs under control.
“The new legislation – which goes before Parliament for the first time today – will also allow the development of new collective pension arrangements based on risk-pooling models. These have been run successfully in other countries including The Netherlands, Sweden and Denmark.
Many employers have expressed an interest in taking forward these new models of pension scheme, once it becomes legally possible. Last month a number of pensions experts and industry figures wrote to The Times newspaper calling for the government to make collective pensions a reality.”
Society of Pension Consultants president Duncan Buchanan says:” It is important to note that responses to the consultation on DA, the results of which were announced today, were submitted before the fundamental “freedom and choice” changes announced by George Osborne in his recent Budget and those responses might have been significantly different today.
“Whilst the responses indicate broad support for the introduction of DA schemes, it is now doubtful that members will favour greater certainty on retirement income levels when it is likely to mean foregoing their new right to draw down all of their retirement savings in full from age 55. There is also a concern that new collective defined contribution schemes require a critical mass of members to work and avoid the risk of becoming a potential Ponzi scheme – where the last remaining members lose out.”
Aon Hewitt senior partner Kevin Wesbroom says: ” Steve Webb has made it crystal clear that an employer’s obligation will be limited to the contributions paid – so there is no danger of the plan morphing into a defined benefit scheme. This will give many employers the reassurance they need, to consider these arrangements seriously when they grapple with the consequences of the Budget and the cessation of DB contracting out.”
ACA chairman David Fairs says: “The creation of a new risk sharing structure is likely to start the creation of new and innovative pension arrangements. However, key to the development of new designs is an overhaul of the existing pension taxation structure, which is overly rigid and complex. For companies to seriously consider introducing such arrangements clarity around how the tax regime applies to risk sharing schemes will need to be resolved quickly and not left until after the Bill has been passed.”
Pinsent Masons pensions lawyer Simon Tyler says: “Defined ambition opens up a range of exciting possibilities. Employers and providers should consider whether any of the proposed options offer opportunities that are worth exploring.
“Employers with DB schemes that still have active members will be disappointed that the government has abandoned its proposals to offer them more flexibility. The government has missed a chance to do something that might have reduced the number of DB schemes being closed.
“It will be interesting to see if collective DC schemes take off. In the early years the take-up may be modest. But the pensions industry should embrace the opportunity to provide an alternative form of pension. It is an opportunity for employers to provide potentially better pensions to members while retaining full control of pension costs. And savers should welcome a form of pension that is likely to provide a higher income in retirement than a standard DC scheme.
“The challenge now is to ensure that the proposals are implemented without undue complexity. As long as the new DA regime isn’t overly prescriptive, and employers and providers take up the challenge, then members could really benefit from being in a pension scheme that offers more certainty than a plain vanilla DC scheme.”