Pension Schemes Bill introduces framework for defined ambition
Last week, the Government published its response to the consultation on “Reshaping workplace pensions for future generations” (see our Alert) and a new Pension Schemes Bill (the “Bill”). The main purpose of the Bill is to introduce a legislative framework for DA schemes, in particular CDC.
In this Alert:
- The Government states that its research and the responses to its consultation on DA indicate that there is appetite for risk sharing among employers, pension providers and savers.
- The Government will not be pursuing its proposals to provide DB schemes with greater flexibility.
- The Bill amends current pensions legislation with the aim of creating a “specific DA pension space”.
- Further to an announcement in the 2014 Budget, the Bill also contains a measure to restrict transfers out of certain types of public service pension schemes.
Designed to slot into the gap between DB and DC, DA is intended to provide employers with pension options which allow for greater sharing of risk, whilst providing more certainty than the traditional DC model for individual pension savers.
In the Government’s opinion, the provision of DA schemes will lead to greater confidence in pension saving and therefore increased engagement.
The Government’s legislative proposals aim to allow for the development of several types of DA scheme, including a pension income builder (where yearly contributions are split between the purchase of a deferred annual nominal annuity and a pooled investment fund). As the intention is that the more detailed design features of the other models may be created within the new legislative framework, specific provision is only made, at this stage, in respect of CDC.
In a CDC scheme, assets are pooled rather than retained in an individual fund. When a member retires, they do not select an individual retirement product, rather the income is paid from the asset pool. This means that members have access to a wider range of investment opportunities than in an individual DC arrangement. The pooling of funds may also act to smooth investment return so that outcomes are more stable.
Popular in countries such as the Netherlands and Denmark, there are several CDC models. For example, individuals may be provided with a target pension income which includes a fluctuating conditional indexation payment, with members’ actual retirement income dependent on the scheme’s available assets. If there is insufficient funding to meet the targeted benefit, the scheme can then opt either to remove the conditional indexation or to reduce the income to be paid.
In some CDC schemes it is possible, in certain circumstances, to reduce benefits in payment. A key feature, which is attractive for employers, is that unless they choose to provide additional support to the scheme, their only liability is a fixed rate of contributions.
No change for DB
The Government also consulted on a package of measures to give employers more flexibility over the nature of the benefits in their DB schemes.
Responses indicated that employers already have options for cost saving within the current system and that to make a real difference the Government would need to permit changes to accrued rights. As the Government is not willing to do so, these flexible DB models will not be pursued.
The Bill introduces new, mutually exclusive, categories for pension schemes. Each type of scheme is defined in terms of the pension promise it provides. Broadly, this promise will either refer to all of the benefits (DB), some of the benefits (shared risk) or there will be no pension promise at all (DC). If a scheme provides more than one type of promise, for the purposes of categorisation it will be treated as more than one scheme.
Provision is also made for consequential changes to current pensions legislation which aim to ensure that it will apply appropriately to each category of scheme.
To allow specifically for the introduction and development of CDC schemes, the Bill defines the concept of collective benefits and makes provision for regulations to be made in respect of matters such as:
- setting benefit targets
- reporting requirements
Restrictions on transfers from public service DB schemes
In its consultation, “Freedom and choice in pensions”, the Government made clear that it would legislate to remove the option to transfer from a public service DB scheme to a DC scheme, except in very limited circumstances. The Bill provides for regulations to be made to achieve this.
This restriction is driven by the perceived increase in the attraction of DC schemes following the changes to the decumulation options announced in the 2014 Budget (see our Alert). As the majority of public service DB schemes operate on an unfunded basis, allowing transfers out of these schemes would expose the Exchequer to significant risks.
TPR’s register of independent trustees
The Bill will also remove the requirement for TPR to compile and maintain a register of trustees for the purposes of making appointments to schemes whose employer has suffered an insolvency event. In future, TPR will be able to make an appointment using its procurement panels in the same way as it does currently when replacing trustees who have been found not to be “fit and proper” to act.
This is a response to the Government’s “Red Tape Challenge” to remove regulations deemed unnecessary or overly prescriptive.
The Bill takes the first step towards the reforms announced in recent months. We expect it will be closely followed by the Pensions Tax Bill, which will deal with the pensions tax measures announced in the 2014 Budget.