RegulationNov 14 2013

Shake-up of workplace pensions

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In a 72-page consultation paper, the Department for Work & Pensions proposed creating a new legal framework to allow employers to continue to offer salary-related pensions instead of closing their final salary schemes.

In a paper, titled ‘Reshaping workplace pensions for future generations’, the DWP outlines plans to create a new pensions regulatory framework that would allow for “greater risk sharing between parties, which could include employers, members, and insurers and investment managers”.

The DWP paper suggests removing regulatory barriers to allow for a new flexible form of defined benefit pensions that will enable employers to continue to offer pensions to members with a high level of certainty, but with much greater flexibility over the nature of benefits provided – these flexibilities will apply to future accruals only within existing DB schemes.

In all the DWP proposed seven potential options, comprising of three ‘designs’ for defined benefits schemes to offer enhanced ‘flexibility’ in the way payments are accrued, and four ‘models’ to offer greater ‘guarantees’ for defined contributions members.

The three designs for flexible defined benefit pensions are:

1. Removing the requirement to index-link on future accruals

2. Ability for schemes to transfer employees to DC schemes when they leave employment

3. Ability to change schemes’ ‘normal pension age’

The four models to offer defined contribution scheme guarantees are:

1. A money-back guarantee on member contributions at the point of retirement or transfer

2. Guarantees over contributions and some investment returns for a fixed period, to be purchased by fiduciaries on behalf of members

3. Retirement income insurance purchased annually from a set age to provide annuity-like guarantees over income

4. Collective defined contribution scheme solution based on Dutch model, where contributions are used to buy annual deferred annuities and a remainder invested in pooled risk-seeking assets.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/255541/reshaping-workplace-pensions-for-future-generations.pdf