Out-Law News | 30 Jun 2014 | 12:42 pm | 3 min. read
So-called 'flexible DB' or 'DB light' was one of three potential types of DA scheme proposed by the government in last year's consultation on more flexible workplace pensions. However, the option is missing from the recently-published Private Pensions Bill. According to consultation feedback, uptake of these proposals would have been minimal unless employers could also apply them to pension rights already accrued - something which the government "does not support", it said.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that although the government had "missed a chance to do something that might have reduced the number of DB schemes being closed", the proposed introduction of DA schemes opened up "a range of exciting possibilities" to employers and pension providers.
"The challenge now is to ensure that the proposals are implemented without undue complexity," he said. "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 defined contribution (DC) scheme."
DB pension schemes promise members a certain level of benefit once retirement age is reached, while the final value of the pension a member receives under a DC scheme depends on the investment performance of that member's contributions. Employers bear the risk of investment movements and of increases in longevity in a DB scheme, while members bear all that risk in a DC scheme. The number of DB schemes remaining open to future accrual has fallen dramatically since the mid-1990s, while DC schemes provide no certainty to members about the level of benefits they will ultimately receive.
The new Private Pensions Bill provides for a third type of scheme, known as DA, where risks would be shared more evenly between scheme members and sponsoring employers. New governance, disclosure and funding requirements would be extended to schemes classified as DA. The legislation also allows for the creation of collective DC schemes based on risk-pooling models, which would come under the new DA regulatory requirements.
In a collective DC scheme, employers and employees pay fixed contributions but the pension risk is shared between members of the scheme. This type of scheme has been particularly successful in Denmark and the Netherlands, where they 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 a regular income through an annuity.
"It will be interesting to see if collective DC schemes take off," said Tyler. "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 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."
Along with the collective DC proposals, the legislation would also allow for guarantee-backed DC pensions that would also be brought within the scope of the new DA regime. These schemes could provide a money-back guarantee to the value of the contributions paid, guarantee a minimum level of income or guarantee a certain level of investment returns. However, the government will not take forward its proposals for more flexible DB schemes, which could have included removing the requirement for schemes to link pensions in payment to inflation or to transfer members to a nominated DC scheme if they left employment before retirement.
In a statement, pensions minister Steve Webb said that 28% of employers had shown an interest in the new pensions.
"The coalition government has already made fundamental reforms to the pensions landscape," he said. "These new proposals are all about encouraging a flourishing and diverse private pensions market by providing greater choice to employers and savers."
"These reforms meet the needs and concerns of business while, at the same time, standing up for the interests of workers who are doing the right thing and saving for their retirement. With the backing of consumers and industry, this Bill will bring about new and realistic pension scheme options for those employers who want to do right by their staff," he said.
The Private Pensions Bill also contains provision for 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 new flexibilities allowing DC savers to use their pension savings as they wish.