Queen's speech confirms introduction of "radical" pension reforms including collective arrangements

Out-Law News | 04 Jun 2014 | 3:55 pm | 2 min. read

Two pieces of legislation announced as part of this year's Queen's speech will introduce "radical reforms" to UK pensions, including the ability of pension savers to pool their resources into "innovative" collective defined contribution (CDC) schemes, according to a pensions expert.

Amongst the legislation that will be introduced before the 2015 election is a Pensions Tax Bill, which will give savers more freedom to access their pension savings in whatever way they wish; and a Private Pensions Bill, which will allow for the introduction of defined ambition (DA) pension schemes as a separate category from existing defined benefit (DB) and DC schemes.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the proposed reforms opened up "a range of exciting possibilities" for UK pension saving. Of particular interest was the government's commitment to CDC schemes, in which individual pension contributions are pooled to form a single 'mega-fund' for investment purposes.

"It will be up to employers whether they decide to adopt a collective DC scheme, and in the early years the take-up may be modest," he said. "But the pensions industry should embrace the opportunity to provide an alternative form of pension. CDC offers 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."

In a collective pension, employers and employees pay a fixed contribution but the pension risk is shared between members of the scheme. They have been particularly successful in the Netherlands, where such schemes pay benefits to members directly from the collective fund in proportion to that person's contributions rather than requiring the member to convert his or her individual contributions into an annuity.

By contrast, in a traditional DC scheme the final value of the pension fund a member receives depends on the performance of that member's individual contributions, meaning that it is that employee who bears the full risk of the pension losing value. The vast majority of the nine million people that the government expects to begin saving more towards their retirement or saving for the first time under automatic enrolment will be enrolled into DC schemes.

Until now, DC savers have generally purchased an annuity from an insurance company that will convert the pension fund, or part of the pension fund, into a regular pension income. However, measures announced as part of this year's Budget would allow members of these schemes to access their saving in any way that they wish from the age of 55, without suffering tax penalties. These proposals will be taken forward as part of the newly-announced Pensions Tax Bill.

The new Private Pensions Bill would allow for the creation of new forms of workplace pension with greater risk sharing between employers and employees. It would create three mutually exclusive definitions for pension scheme type based on the degree of certainty in the benefits offered to members. New 'defined ambition' governance, disclosure and funding requirements could be extended to schemes that offer salary-related benefits without going as far as to offer a guaranteed retirement income; or DC-style benefits backed by a guaranteed minimum level of income or guaranteed investment returns. CDC schemes would come under the new DA regulatory requirements.

"Defined ambition opens up a range of exciting possibilities," said pensions expert Simon Tyler. "Employers and providers should consider whether any of the proposed options offer opportunities that are worth exploring. Members will welcome anything that gives them more certainty about their retirement income than plain vanilla DC."

The Private Pensions Bill will also include a new 'guidance guarantee', under which all members of DC pension schemes would be offered "free and impartial guidance" on the range of options available to them at retirement. This measure was announced as part of this year's Budget along with the new flexibilities for DC savers.