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New types of pension schemes – fact or fiction?

New types of pension schemes – fact or fiction?

The UK Department for Work and Pensions’ consultation “Reshaping workplace pensions for the future” (the Consultation) closed at the end of 2013.  The report on the Consultation is expected this Spring and will explain the action the Government aims to take on the Consultation and on introducing draft legislation later in 2014.

What does DWP mean by “reshaping” pensions?
In one sense the process of reshaping pensions has been continuous: successive governments have added layer upon layer of statutory pension requirements, pulling the strait jacket in which pensions schemes exist ever tighter.  The result has been predictable: the falling away of good pension provision, evidenced by the closure to accrual/winding up of defined benefit schemes.

This has been coupled with members’ lack of focus in defined contribution pensions.  This time not the fault of Government but due to poor investment returns, low annuity rates and increased longevity.

The “Reshaping” DWP has in mind is not, save at the fringes, adjusting existing schemes but introducing  different types of new schemes, collectively referred to by the DWP as “Defined Ambition” schemes.  These ideas are not from the corridors of Whitehall but stem from the work of an Industry Group working with DWP to develop new pensions policy.

DWP envisage “Defined Ambition” schemes giving members some form of guarantee, but not complete certainty, over their pension increase.  This would apply to:

  1. existing schemes which adopt new flexibilities; and
  2. new types of scheme such as DC schemes with certain new types of guarantee.

Within the above parameters there are interesting combinations, for instance:

  • schemes on a defined benefit basis for part of their benefits, but discretionary (eg depending on investment performance) for the “fluctuating” part of the benefits; and
  • schemes based on defined contributions but with capital or investment returns guaranteed to an extent, and/or a system like the Dutch system where a proportion of contributions are used to purchase deferred annuities and the balance invested into a collective pool of risk seeking assets.

How to legislate for “Defined Ambition”?
The legal framework for “Defined Ambition” is very important as DWP recognises in Chapter 6 of their Consultation.  DWP propose that a specific new space in pension legislation will be created for DA schemes.  In future there will be legislation relating to DB, DC and DA schemes respectively.  As the Consultation puts it, there will be “new definitions of DA and DB schemes, distinct from each other and from money purchase schemes”.

Our view on DWP’s approach:

  1. this is a very major legislative undertaking;
  2. how DA schemes are to be treated under the numerous different strands of existing pension legislation (disclosure, preservation, funding, debt regulations, PPF Rules etc) will need very careful working out and skilful drafting; and
  3. it is a sobering thought that 21 years after defining “money purchase benefits” in Pension Schemes Act 1993 and following the “Bridge” decision, it has been acknowledged that the 1993 definition does not implement  DWP’s original intention.  Hence the revised definition of money purchase benefits in Section 29, Pensions Act 2011.  The new definition in Section 29 will come into force once transitional provisions take effect in new Regulations. This will assist schemes which have relied on the pre Pensions Act 2011 definition. The new Regulations  are proving complex to draft.  This all goes to show the absolute importance of new concepts such as the new “Defined Ambition Scheme” being well thought out and drafted.

Wedlake Bell’s view…
The pensions landscape is changing.  Contracting out on the DB basis is expected to cease for future accrual from 6 April 2016.  At the same time, auto-enrolment is resulting in a massive increase in DC members.  So, in some ways a good time to be introducing new flexibilities such as “Defined Ambition”.  However, given the General Election in 2015 time is not on the Government’s side.

The complexity of “Defined Ambition” means it is unlikely the Consultation attaching draft legislation will be published until later this year. It remains to be seen whether there will then be time for a Pensions Bill this calendar year followed by enactment next year ahead of the Election.

By Clive Weber

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