A 70-page consultation, Reshaping Workplace Pensions for Future Generations, published on 7 November, is part of the DWP’s ongoing initiative to coax schemes into offering more certainty for members.
The consultation proposed various risk-sharing models for defined ambition schemes that would give employers the discretion to remove index-linked guarantees, shift the normal pension age forward to take account of longer lives and automatically transfer funds to a DC scheme if an employee leaves the company before retirement.
Four guarantees for members have been put forward. These include the option to secure the return of capital equivalent to contribution levels or a certain level of investment return on top of capital.
Retirement income insurance could also be used to lock in a minimum level of retirement income. This would kick in once a saver’s funds were reduced to zero and would be paid for through an extra annual management charge. The last guarantee, based on a Dutch DC pension model, would use a proportion of the member’s assets to buy a deferred nominal annuity, with the rest collectively invested.
Schemes could also opt to pool all pension assets under a ‘collective DC’ model instead of allocating a separate fund for each member where returns on contributions were individually calculated. Each employee could then receive an income from the pooled fund, thus smoothing out volatility on the returns in each individual pension fund.
Support for the proposals could be stronger among pension providers than previously thought, according to a poll carried out by the Association of Consulting Actuaries. Some 61 per cent of businesses surveyed would be open to the idea of schemes that capped pension costs while offering greater certainty to members.
The consultation closes on 19 December.
Laith Khalaf, head of corporate research for Bristol-based Hargreaves Lansdown, said: “Employers are in the middle of implementing auto-enrolment, one of the biggest shifts in workplace pension provision ever embarked upon on the UK.
“Talking to them about flexible defined benefits is about as useful as offering a marshmallow to someone fighting a fire. The DWP should be focusing its energy on making auto-enrolment work rather than carrying on with this wild goose chase.”
The number of DB schemes documented by the Occupational Pension Schemes Survey in 2012
John Ball, head of UK Pensions for international professional services company Towers Watson, said: “There was a tension between the pensions minister’s desire to encourage guarantees and his plans to cap charges, and to have DC pensions automatically following employees from job to job. The paper suggests the DWP is prepared to square the circle by exempting DC schemes that buy guarantees for members from both the charge cap and pot follows member.”
Hugh Nolan, executive director of London-based JLT Employee Benefits, said: “The impact of layer upon layer of regulation on private sector final salary is well known and it is imperative therefore that this is cross-party support for any regulation-light framework in respect of defined ambition. For many employers it will be a case of once bitten twice shy and for these organisations sufficient assurance will be needed for them to engage with the defined ambition proposals.”