As reported in Professional Pensions today Steve Webb has set out proposals for the design of defined ambition pension schemes in a DWP paper Reinvigorating Pensions. This paper sets out the government's desire to move workplace pensions to risk-sharing structures, proposals for reforming pension scheme charges and suggestions as to how public trust in pensions can be rebuilt.
Whilst this debate is healthy, will it really persuade employers (without legislative change) who have already made the move to pass both longevity and investment risks to its employees through the use of DC pension vehicles to want to start sharing some of this risk again?
Those employers who feel sharing of risk is important have already moved to career average or cash balance schemes which would meet the governments definition of Defined Ambition. But there are also examples of companies that have still found the unpredictability of these career average/cash balance schemes not sustainable and having moved from Final Salary to a type of schemes the paper describes as DB-lite have subsequently moved to full DC arrangements.
Perhaps the solution that employers will find more palatable are therefore the DC-plus options rather than DB-lite.
The DC-plus options set out in the paper (and I am sure there are more) are summarised below:
DC-plus optionsWhilst this debate is healthy, will it really persuade employers (without legislative change) who have already made the move to pass both longevity and investment risks to its employees through the use of DC pension vehicles to want to start sharing some of this risk again?
Those employers who feel sharing of risk is important have already moved to career average or cash balance schemes which would meet the governments definition of Defined Ambition. But there are also examples of companies that have still found the unpredictability of these career average/cash balance schemes not sustainable and having moved from Final Salary to a type of schemes the paper describes as DB-lite have subsequently moved to full DC arrangements.
Perhaps the solution that employers will find more palatable are therefore the DC-plus options rather than DB-lite.
The DC-plus options set out in the paper (and I am sure there are more) are summarised below:
- A money back guarantee funded by a levy on members' funds. This would share the investment risk between the individual member and the mutualised fund.
- A guarantee to cover retirement income in later years, funded by a levy on members' funds.
- A guaranteed fixed-period return purchased on a member's behalf, incorporating risk sharing and guarantees.
- Standardised income guarantee insurance.
- Employer-funded ‘smoothing fund', where the employer would pay a percentage of ‘core' contributions into a central fund that is used to manage a targeted outcome at retirement, possibly via annual bonuses or final terminal bonus.
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