‘Defined ambition’ pensions are way forward

The way in which Canadian provinces set their own pensions legislation may be used to create appropriate schemes for UK investors, the Pensions Policy Institute has said.

In a 25-page paper, Risk Sharing Pension Plans: The Canadian Experience, the PPI pointed out that there were potential lessons the UK could learn from Canada.

These included the need to give employers and employees “freedom and choice” to allow different levels of contributions and benefits for participants, and to extend shared-risk or collective benefit arrangements to relatively small employers and pension plans if governance overheads can be shared.

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Unlike in the UK, there is no requirement to annuitise in Canada and, on average, only 20 per cent of those reaching retirement each year buy an annuity.

The PPI referred to the use of target benefit plans, which aim to combine the elements of both defined benefits and defined contribution pensions.

A target benefit plan has either fixed contribution payments or ones that are variable within a narrow and predefined range.

Key points: Statement of risk for shared-risk pension plan of the New Brunswick Investment Management Corporation (Canadian pension fund)
1) Objectives are to preserve the capital value of the pension fund and the best possible long-term real return.
2) Over shorter time periods the objective will be to achieve competitive rates of return on each major asset class while avoiding undue investment risk and excessive market volatility.
3) Over the medium term, the corporation will provide rates of return in excess of those achieved by passive management of the policy portfolio.

Plan members are offered a targeted defined-benefit type of pension at retirement, but their benefits may be adjusted both up and down to balance the plan’s funding.

Target benefit plans are also structured around two types of benefit components: base, which are calculated on a career average formula; and ancillary, which are additional, such as early retirement subsidies.

In its paper, the PPI concludes that the experience of Canada was of “direct relevance” to the UK’s development of shared-risk and collective defined contributions pension schemes.

These include making the conversion of defined benefits rights to CDC schemes easier, giving both employees and employers the flexibility to transfer funds and to increase contributions, respectively, to allow for funding issues and differing retirement needs.

Adviser view:

Scott Mullen, IFA for My Pension Expert in South Yorkshire, said: “The idea of a combined DC and DB scheme sounds good, but increasing contributions ad hoc may not be ideal.”