Defined ambition pension schemes
Standard Note:
SN 6902
Last updated:
22 September 2014
Author:
Djuna Thurley
Section
Business and Transport Section
At present, there are two types of occupational pension: Defined Benefit (DB) schemes that
typically promise a pension linked to salary and length of service; and Defined Contribution
(DC) schemes that pay out a sum based on the value of a member’s fund on retirement.
The last few decades have seen a decline of DB schemes, with a number of factors
combining to make them less attractive to employers. Membership of DC schemes has
increased, and is expected to increase further as automatic enrolment is rolled-out. A key
difference between the scheme types is who bears the risk. In DB schemes, longevity,
inflation and investment risks are borne by the employer, whereas in DC schemes they are
borne by the employee and there is a very high level of uncertainty about the level of income
they can expect in retirement.
The Government has been consulting on the possibility of encouraging the development of
‘defined ambition’ (DA) pension schemes, the aim of which would be to create greater
certainty for members than is provided by a pure DC pension, but at less cost volatility for
employers than current DB pensions. In particular, it has looked at how collective defined
contribution schemes might work in the UK. Its proposed model for this would have a fixed
contribution rate for employers, a target pension income for employees (with provision for
this to be adjusted if the scheme is under-funded); and pooling of scheme assets (rather
individual funds for each member), with an income paid from this pool at retirement. The
Government found that this approach could provide greater stability of outcomes for
individuals than traditional DC, with pension incomes less dependent on market conditions at
the point of retirement. However, certain conditions appeared necessary to enable them to
operate successfully – in particular, large scale and strong governance. (DWP, Reshaping
workplace pensions for future generations, Cm 8710, November 2013, chapter 5).
The Pensions Schemes Bill 2014/15 would provide for new categories of pension schemes:
defined benefit, shared risk and defined contribution and a framework for schemes to provide
‘collective benefits’. This note looks at the development of the proposals for defined ambition
schemes and the relevant provisions in the Bill. The Bill had its Second Reading on 2
September. Other provisions in the Bill are discussed in Library Research Paper RP Pension
Schemes Bill (21 August 2014).
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and is not intended to address the specific circumstances of any particular individual. It should
not be relied upon as being up to date; the law or policies may have changed since it was last
updated; and it should not be relied upon as legal or professional advice or as a substitute for
it. A suitably qualified professional should be consulted if specific advice or information is
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Contents
1
Introduction
3
2
Consultation process
6
Response
8
3
4
5
6
Proposals for introducing more flexibility in DB
10
3.1
Background
10
3.2
The Labour Government’s Deregulatory Review
11
3.3
The current Government’s proposals
12
The ability to pay fluctuating benefits.
13
Automatic conversion to DC for early leavers
13
Ability to change scheme pension age
13
Responses
14
The Government’s response
15
Proposals for providing greater certainty within DC
15
4.1
Money-back guarantee
16
4.2
Capital and investment return guarantee
17
4.3
Retirement income insurance
18
4.4
Pension income builder
19
Proposals for collective benefits
19
5.1
Occupational pension provision in the Netherlands
20
5.2
Proposals for the UK
22
5.3
Debate
24
Outcomes
24
Viability of CDCs in the UK
25
Intergenerational equity
26
Compatibility with the Budget 2014 announcements
27
Pension Schemes Bill 2014/15
28
1.1
The legislative approach to ‘defined ambition’
29
1.2
Part 1 – definitions
32
Defined benefits
33
Shared risk
34
Defined contributions
35
Meaning of pension promise
35
2
1.3
1.4
1
Treatment of a scheme as two or more separate schemes
36
Interpretation of Part 1
37
Amendments to do with Part 1
37
Part 2 – general changes to pensions legislation
38
Promise obtained from a third party
38
Disclosure of information
39
Extension of preservation of benefit under occupational schemes
39
Early leavers: revaluation of accrued benefits
40
Early leavers: transfer values
41
Indexation requirements
41
Rules about modification of schemes
42
Part 3 – collective benefits
43
Approach to legislation
43
Definition
47
Targets
47
Investment strategy
48
Valuation reports
49
Policy for dealing with a deficit or surplus
50
Other provisions
51
Introduction
There are currently two main types of occupational pension schemes:
- Defined Benefit (DB) schemes, that typically promise to pay a pension linked to salary and
length of service; and
- Defined Contribution (DC) schemes, that typically pay out a sum based on the value of a
member’s fund on retirement. The level of pension depends on factors such as the level of
contribution paid and investment returns.
A key difference between these types of schemes is who bears the risk. In DB schemes, the
risks inherent in pension saving – for example, those associated with longevity, investment
and inflation - are borne by the sponsoring employer. In DC schemes, they are borne by the
individual.1
DB schemes are in decline. Total active membership peeked in the 1960s at 8.1 million, and
has fallen to 1.7 million by 2012.2 The reasons for this have been the subject of much debate.
1
2
DWP, Pension Schemes Bill Impact Assessment, June 2014, page 12, para 9
Ibid page 10-11
3
A report by the Pensions Policy Institute (PPI) in 2012, identified a number of contributory
factors including:
Increased Life Expectancy: Increases in life expectancy over the last 30 years due to
medical advances and improved lifestyles have meant that people are living longer.
[…]
Investment risk: Investment risk can be a significant issue for sponsors of DB
schemes. The returns on bonds and equities will affect the funding position of DB
schemes. Where a scheme is in deficit, lower returns will increase the level of
contributions required to close the deficit. Over the last decade, bond yields and equity
returns have been volatile, and over the longer term the outlook for investment returns
remains uncertain.
Inflation: The value of the pension received and the cost of providing pensions may be
affected by changes in price inflation. In DB schemes revaluation of accrued benefits
and indexation of pensions in payment are key parts of scheme design. There is a cap
on mandatory indexation and revaluation in DB schemes. For the scheme sponsor the
cap reduces the level of inflationary risk but it does not eliminate it entirely.
Wage inflation can also increase the cost of providing DB pensions. For example, if an
active member of a final salary DB scheme receives a substantial increase in pay at
the end of their career, this can disproportionately increase the cost of providing the
resulting annual pension.
Changes in regulation and legislation: Many different pieces of legislation have
been introduced since the 1970s, predominantly with the aim of protecting individual
pension rights. However, many of these changes have also led to increased costs for
DB schemes, or reduced the attractiveness of providing DB pensions. These include:
·
·
·
·
·
measures to protect members’ rights and the security of pension benefits;
changes in the taxation of pension funds;
EU regulations, such as equal treatment of men and women’s pensions;
tighter accounting standards for DB pensions;
revised standards for DB pension scheme funding.
However, the Government recently changed the measure of inflation required to be
used for the indexation and revaluation of DB pensions from the Retail Prices Index
(RPI) to the Consumer Prices Index (CPI). Those DB pension schemes that are able to
make this change are likely to reduce their costs of providing a DB pension. 3
It found that overall these factors had significantly increased the cost and risks to employers
of providing DB pensions.4
The decline in DB has, to some extent, been offset by an increase in DC provision. DWP
explains:
Between 1997 and 2012, the proportion of employees with a DB occupational pension
scheme fell from 46 per cent to 28 per cent, while DC pension scheme membership,
3
4
PPI, The changing landscape of pension schemes in the private sector in the UK, 27 June 2012
Ibid
4
including group personal and group stakeholder pensions, rose slightly, from 10 per
cent to 17 per cent - though not enough to replace the fall in DB membership.5
In its Second Report, published in December 2005, the Pensions Commission said that a
delayed response to rising costs had meant that manner of the adjustment, when it
happened, had exacerbated inequalities in pension provision:
The exceptional equity returns in the 1980s and 1990s allowed many private sector DB
schemes to ignore the rapid rise in the underlying cost of their pension promises.
When the fool’s paradise came to an end, companies adjusted rapidly, closing DB
schemes to new members.
A reduction in the generosity of the DB pension promises which existed by the mid1990s was inevitable. That generosity had not resulted from a consciously planned
employer approach to labour market competition, and would never have resulted from
voluntary employer action well informed by foresight as to the eventual cost, or
operating within rational expectations of equity market returns.
But the suddenness of the delayed adjustment, its extremely unequal impact as
between existing and new members, and the major shift of risk occurring as many
people move from DB to DC provision, have severely exacerbated the gaps that have
always existed in Britain’s pension system.6
The Commission recommended the introduction of auto-enrolment as a way of
addressing the decline in pension saving.7 It was legislated for by the Labour Government in
the Pensions Act 2008.8 The current Government, following a review, decided to continue
with its implementation.9 The policy is therefore being introduced in stages over the period
2012 to 2018.10 The Government expects auto-enrolment to increase the number newly
participating or saving more in a workplace pension saving scheme by between six and nine
million. The policy is also expected to reduce the numbers facing inadequate retirement
incomes.11 However, the vast majority of those automatically enrolled will be saving into DC
pension plans, in which outcomes are uncertain and individuals bear the risks of pension
saving.12
In its November 2012 discussion paper, Reinvigorating workplace pensions, the Government
said that while engagement with pensions might increase as auto-enrolment was
implemented, many individuals would not be comfortable with the level of risk and
uncertainty involved in saving in DC pension schemes. It was therefore keen to explore the
scope for what it termed ‘Defined Ambition’ (DA) schemes, which would seek to give “greater
certainty for members than a DC pension about the final value of their pension pot and less
cost volatility for employers than a DB pension.” 13
5
DWP, Framework for the analysis of future pension incomes, September 2013, para 4.3
Pensions Commission, Second Report, December 2005, p125
7
Pensions Commission, A New Pension Settlement for the Twenty-First Century; The Second Report of the
Pensions Commission, November 2005, p2-4
8 Part 1
9 ‘Making automatic enrolment work. A review for the Department for Work and Pensions’, October 2010; HC Deb
27 October 2010 c12WS; For more detail, see SN 6417 Pensions: automatic enrolment – 2010 onwards
10 HC Deb, 31 January 2012, c31-2WS; SI 2012/1813
11 DWP, Framework for the analysis of future pension incomes, September 2013
12 DWP, Pension Schemes Bill Impact Assessment, DWP, 2014-0911, 26 June 2014
13 DWP, Reinvigorating workplace pensions, Cm 8478, November 2012, p56
6
5
2
Consultation process
In its November 2012 discussion paper, Reinvigorating workplace pensions, the Government
said that while engagement with pensions might increase as auto-enrolment was
implemented, many individuals would not be comfortable with the level of risk and
uncertainty involved in saving in DC pension schemes. It was keen to explore the scope for
what it termed ‘Defined Ambition’ schemes. These would:
[…] seek to give greater certainty for members than a DC pension about the final value
of their pension pot and less cost volatility for employers than a DB pension. 14
In November 2013, it launched a public consultation, Reshaping workplace pensions for
future generations (Cm 8410). This set out the challenges it thought Defined Ambition
needed to respond to, as follows:

Structural: the polarisation of risks represented by traditional DB and DC
pension schemes creates the perception of an incomplete system, with the
burden of risk falling wholly on the employer or, increasingly, being placed on
the individual. DA should provide the space for a greater amount of risk
sharing.

Regulatory: the criticism that the DB promise brings too great a regulatory and
funding burden to the employer. DA should consider reducing some of the
regulatory requirements on DB and any new DA framework should be clear
about the limits of employer liabilities, and avoid creating new regulatory
burdens.

Supply/demand: demand from employers and employees for something
between DB and DC is not being met by the market. There is a need to
examine the extent to which Government intervention is needed to stimulate
innovation.

Member-driven product design: the extent to which uncertainty about
pension savings and retirement incomes from a DC scheme (however good) is
a disincentive to save in a pension.15
It proposed a number of principles for their development:
A DA scheme should be:
14
15

Consumer focused – address consumer needs (members and employers).

Sustainable – affordable to the
providers/members) over the long term.

Intergenerationally fair – not biased to pensioners, but also take on board
needs of future pensioners.

Risk sharing – incorporate genuine risk sharing between stakeholders.

Proportionately regulated – the regulatory structure needs to be permissive
to enable innovation in risk sharing, while protecting member interests.
stakeholders
(employers/pension
DWP, Reinvigorating workplace pensions, Cm 8478, November 2012, p56
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p10
6

Transparent – there should be high governance standards with clarity for
members about any promise made and any associated risks.16
The Government said it would review the regulatory structure, with a view to enabling a more
equitable sharing of risk:
13. The Government’s role in private pensions involves regulating schemes, products,
providers and employers in a number of ways – with member protection at the heart of
these activities.
14. With automatic enrolment into workplace pensions, the Government is intervening
to address the need for more people to be saving for their retirement, recognising that
inertia can lead to individuals not saving.
15. With DA, the Government proposes to review the regulatory structure where it
inhibits employers, or the wider market, innovating and providing pensions which meet
consumer needs, while providing a more equitable sharing of risk and ensuring where
promises are made, they are kept. This balance should ensure the voice of the
consumer is heard while there is less prescription about the offer that employers or the
market should make.17
From its discussions with employers, it had found that:

Employers were positive about offering pensions but wanted schemes that were
simple to set up, where costs will not increase in future;

They were concerns about generating a pension liability that would have an adverse
impact on business accounts;

In some sectors, a major factor influencing decisions on pension provision was what
other employers were offering. Employers often positioned themselves to match the
market rather than lead it;

Willingness of employee benefit consultants to advise and recommend new products,
and of established providers of pensions administrators to support them, was key to
these products becoming established in the market.18
Key considerations were that the new schemes should not cost more than traditional DC and
that there should be no funding liability on the employer’s balance sheet.19 For savers, the
evidence suggested that a savings product that could provide more certainty about savings
or about income in retirement might be better able to earn consumers’ trust and confidence
than individual DC products.20
An industry working group looked at a number of possible models, including: lighter versions
of DB, DC pensions with an element of guarantee, and collective defined contribution
schemes. These are discussed in more detail below.
16
Ibid p 11
Ibid p 11
18 Ibid p13-14
19 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p9 and 12
20 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p15; See also NEST,
Pensions insight – 2014
17
7
In June 2014, the Government said the consultation had confirmed the need for a new
framework that would “create a clear DA space with its own regulatory protections to
encourage innovation in risk sharing and enable new kinds of collective models.” It would
retain its original approach, with some refinements:
We intend to retain the overall approach and principles set out in the consultation
document, with some refinements. We will continue, as intended, to establish mutually
exclusive definitions for scheme type based on degrees of certainty for members. We
will also ensure proportionate regulation by applying requirements to certain features –
where there is a promise, for example, ensuring it is funded – while still maintaining
transparency in the law so that employers are clear on the extent of their obligations.
We are committed to avoiding legislation that is overly prescriptive; instead, we want to
allow schemes to evolve and innovate.
Where we have deviated from the ideas set out in the consultation, we have put
additional safeguards in place to ensure the new schemes work to their full potential.
We are introducing a new definition of collective benefit, which could be offered under
DA or defined contribution (DC) schemes. We will refine the definition of DB scheme to
take account of certain discretionary features which already exist in some DB schemes
and broaden the definition of DC to cater for self-annuitising and CDC schemes (that
do not provide a promise or guarantee during the accrual phase). Money purchase
schemes will fall within the DC scheme definition. 21
It said it had decided not to proceed with proposals for flexible DB. This was because, to
make enough of a difference, the suggested changes would need to have applied to accrued
rights, which was not the Government’s intention.22 Regarding its proposals for providing
greater certainty for DC scheme members, it thought the detail of some of its proposals
(capital and investment guarantee, retirement income insurance and pension income builder)
should be worked out within the legal parameters of the new legislative framework.23 It would
also legislate for schemes to provide collective benefits. The issues connected the proposals
are discussed in more detail below.
Response
The responses to the consultation indicate a general support for creating a new space in the
legislative framework for DA pensions to develop. The RSA, for example, has argued the
case for a new type of pension provision:
Britain is witnessing the collapse of its Defined Benefit pension system throughout the
private sector. Individual DC pensions are struggling to fill the gap. But they alone
cannot provide an efficient pension savings system for everyone. Collective, pooled
pensions such as Target Pension Plans provide employers with an alternative way to
offer pensions that meet the needs of their employees, without taking on additional
burdens themselves.24
The National Employment Savings Trust (NEST) has also welcomed proposals for DA,
arguing that it was unlikely that any traditional DC scheme could give satisfactory answers to
three basic questions put by savers:
21
DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014
22 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, 24 June 2014, page 28
23 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, chapter 2
24 RSA, Collective pension plans briefing note, 2014
8
What will I get out at the end?
What happens to my money when it’s in the scheme (‘where does my money go?’)
How safe it my money?25
The ABI has welcomed the opportunity to debate a “range of alternative ways to improve
certainty for pension savers.”26
The TUC questioned whether a new legislative framework to enable innovation would be
enough:
While we welcome changing the law to allow Dutch-style target pensions, this will not
automatically result in any being set up. We need government action to ensure that
workers have access to target pensions as the bigger they are, the better they work.
Leaving it to the market is never a solution when it comes to pensions. 27
The National Association of Pension Funds (NAPF) agreed it was important to have a
legislative framework that would develop as the pensions landscape continued to evolve.”28
However, the focus must remain on providing good outcomes for DC scheme members:
CDC may well have a role to play in this, but the fundamentals still apply. Good
outcomes for members are built on strong governance, low charges and investment
strategies based on members' needs. The real goal here has to be schemes operating
at scale. Scale is a necessary precondition for CDC but it also enables a much wider
range of member benefits. As a result of automatic enrolment we are already seeing
the emergence of large pension schemes in the form of master trusts, which are able
to offer their members high quality investment strategies and great value for money.29
Unite stressed the importance of employer contribution rates and action on charges to
improve outcomes for DC scheme members.30
Age UK said that new proposals should not distract from other priorities, such as the
‘guidance guarantee’ announced at the 2014 Budget:
These new proposals must not distract us from the major changes happening now.
The Government’s clear priority must be to deliver on its commitment to provide highquality, impartial pensions guidance, to help people to be more secure in later life.31
There are also, of course, a range of views on specific proposals. These are discussed in
more detail below.
NEST, Reshaping workplace pensions for future generations – consultation response, 2014
‘ABI response to the DWP Defined Ambitions Pensions consultation’, 7 November 2013
27 ‘Pensions bills pull in opposite directions, says TUC’ 4 June 2014
28 NAPF, Reshaping workplace pensions for future generations – the NAPF’s response, December 2013
29 NAPF comments on Queen’s speech, 4 June 2014
30 Unite response to Reshaping workplace pensions, December 2013, p11
31 Age UK’s response to Queen’s Speech, 4 June 2014; HC Deb 19 March c793
25
26
9
3
Proposals for introducing more flexibility in DB
3.1
Background
In its 2007 report on the changing landscape for private sector Defined Benefit pension
schemes, the Pensions Policy Institute explained how and why regulation had developed to
that point:
The number and scope of legislative and regulatory rules have been increasing since
the 1970s. The aim of much legislation affecting pensions has been to increase the
protection of early leavers’ and pensioners’ rights, and to make occupational pension
scheme provision fairer and more transparent. The Government would argue that the
policies have helped maintain public confidence in pensions. But in certain cases,
critics have argued that these rules have added to the cost of pension promises.
Increased regulation
Government regulatory policy focuses on three main themes: to increase the level of
members’ benefits; and/or to increase the security of members’ benefits; and/or to
improve the running of schemes:
To increase the level of members’ benefits. A sponsoring employer of a DB
scheme is expected to pay sufficient contributions to ensure that the promised
pension benefits are paid once the employee retires. However, until recently the
level of guarantee backing a pension promise has not been clearly defined.
A key change to pension schemes over the last 20 years has been the
replacement of discretionary benefits by guaranteed benefits; in particular,
increases to pensions in payment (i.e. pensions already being paid to members in
retirement) and to pensions in deferral (i.e. pension rights of members that are no
longer contributing into the scheme).
For example, early leavers were granted greater protection under the Social
Security Acts of 1973 and 1985. Initially, only those who stayed in the scheme for
more than 5 years were entitled to a preserved pension. Then the time limit was
reduced to 2 years. This reduced the cross-subsidy from early leavers to stayers,
which had previously helped to keep costs down.
Statutory increases to pensions in payment originated in the Pensions Act 1995.
The original law stated that post 1997 accrued rights were required to increase in
line with the Retail Price Index, capped at 5%. This requirement is called Limited
Price Indexation (LPI) and is often cited as having a large impact on the cost of
running DB schemes. Later revisions to the law in the Pensions Act 2004 reduced
the requirement. From 6 April 2005 any pension built up in a salary-related scheme
now has to increase in payment by 2.5% per annum, or in line with the RPI if this is
less.[…]
To increase the security of members’ benefits. The Pension Protection Fund
(PPF), established in 2005, is intended to provide compensation should an
employer with an underfunded pension scheme became insolvent. This is done by
pooling the assets and liabilities of all DB schemes; so that, broadly speaking, wellfunded schemes can subsidise weaker schemes through a levy that is charged to
all of them.[…]
To improve the running of schemes. The Pensions Act 2004 introduced tighter
regulations for DB scheme funding, which came into effect from September 2005.
10
Trustees of schemes providing defined benefits must now adopt a new statutory
funding objective. This requires the scheme to have sufficient assets to cover an
actuarial estimate of the amount needed to pay the benefits when due. Trustees
must prepare a statement of funding principles specifying how this objective will be
met along with a schedule of contributions specifying rates of contributions due to
be paid by the employer and by active members. If the statutory funding objective
is not met, the trustees must prepare a recovery plan to correct the shortfall within
a specified period. This process is to be monitored by The Pensions Regulator
(TPR), which has powers to seek additional funding for a pension scheme.32
3.2
The Labour Government’s Deregulatory Review
In October 2007, the Labour Government set up a Deregulatory Review of Private Pensions.
The background to this was that:
3. The present regulatory system governing occupational pensions has grown
incrementally over the course of the past thirty years. It is now, by common consent,
lengthy, complicated and hard to understand. Although each successive layer usually
had the aim of protecting scheme members or simplifying the regulatory structure,
there have been unintended consequences, leading to undesirable outcomes. Whilst
by no means wholly attributable to the growth of regulatory burdens, there is little doubt
that the weight of regulation has contributed to a belief by some employers that the
costs and risks of having their own pension schemes are becoming too great.
Its objective was to reduce legislative burdens while recognising that there was a balance to
be struck between reducing legislative complexity and protecting members’ interests.33
In their report, published in December 2007, the review team said that if the two problems of
DB schemes (regulatory burden and open-ended risk) could be alleviated sufficiently, this
would make it easier for companies to consider DB schemes, or at least an element of DB
provision, once again. They had placed the emphasis in their recommendations on:

encouraging the introduction of risk-sharing DB schemes, where the employer
is unwilling to bear all the risks on an open-ended basis;

removing or easing regulatory obstacles in DB schemes which are hindering
sensible courses of action by companies (such as some of the employer debt
regulations, and regulations restricting to an unreasonable extent the ability of
the employer to reclaim any surplus which arises);

moving towards simple outcome-related principles in some areas of regulation,
leaving companies and trustees free to achieve these outcomes in their own
ways, with resulting economies and efficiency, and hopefully a greater
understanding by pensions professionals of what outcomes are required.
None of their recommendations would affect accrued rights. They suggested that, in addition
to looking at ways to deregulate DB schemes, the Government should also “examine ways in
which some of the risks for the members of DC schemes could be lessened where the company
is willing to do so.” 34
32
PPI, The changing landscape for private sector Defined Benefit pension schemes, October 2007
DWP, Deregulatory review – Government response, October 2007, p35
34 Deregulatory Review of Private Pensions, An independent report to the Department for Work and Pensions,
July 2007; Foreword
33
11
In its response, the Labour Government said it was “difficult to strike the right balance
between removing legislative burdens and protecting members.” It did not believe that there
was “a single measure or even a series of measures which would guarantee that employers
would continue to provide and even strengthen their existing pension provision.”35 It agreed
with the reviewers that “it would not be appropriate to make changes which would affect
rights which have already accrued.”36
Following further consultation, it legislated in the Pensions Act 2008 to:

reduce the cap applying to the revaluation of deferred pension rights from 5% to 2.5%
(intended to apply to future rights, accrued from January 2009); and

repeal the rules on “safeguarded rights”, which currently apply when a pension is
shared on divorce or dissolution of a civil partnership.37
As part of a consultation on risk-sharing launched in June 2008, the Government considered
whether to allow conditional indexation (where indexation depends on the financial health of
the scheme).38 However, it decided against this on the grounds that the consultation had not
provide sufficient evidence that it was likely to make the significant impact on the level of DB
provision to justify overriding the concerns of member representatives. 39
For more detail, see Library Note SN 4515 Deregulatory Review of Private Pensions
(September 2009).
3.3
The current Government’s proposals
The current Government’s motivation for a “lighter version of DB” was to stem the long-term
decline in DB pension provision:
Without government intervention to allow more flexibility and reduce constraints for
employers sponsoring DB pensions, DB is likely to disappear almost completely from
future pension arrangements.40
However, the Government did not think that employers should have the power to transfer or
modify accruals built up under the previous arrangements into new arrangements, beyond
what was allowed under existing legislation. This meant that:
[…] deferred and pensioner members, and the past accrued benefits of active
members, would not be affected as a consequence of introducing DA pensions. 41
Specific measures under consideration included removing, for future accruals only, the
statutory requirements for the indexation of pensions in payment.42 This flexibility would add
to those already scheduled to occur with the abolition of contracting-out in April 2016:
9. The introduction of the single-tier State Pension means that contracting will end.
Formerly contracted out DB pension schemes will no longer have to provide specific
benefits for future accruals and this will mean that requirements to automatically
35
36
37
38
39
40
41
42
DWP, Deregulatory review – Government response, October 2007, Executive Summary
Ibid
Sections 101 to 102
Ibid, p3-4
DWP, ‘Risk sharing consultation: Government response’, December 2008, page 2
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013 p16
Ibid p25
Ibid p18
12
provide rights for survivors on future accruals will fall away. This provides an
opportunity to simplify the administration of DB pensions. 43
Flexibilities already available for DB scheme sponsors included switching to schemes
providing benefits on the basis of career average revalued earnings rather than final salary or
moving to a cash balance scheme.44 In addition employers could place a cap on the level of
earnings that would count as ‘pensionable pay’. However, these features were not in
widespread use.45
As part of the development of its proposals for DA, the Government considered three specific
proposals for flexible DB: the ability to pay fluctuating benefits, automatic conversion to DC
when an employee left the scheme early, and the ability to change scheme pension age.
The ability to pay fluctuating benefits.
For example, employers could choose to provide additional benefits - such as indexation above the simplified DB level when the scheme funding position allowed. Legislation to
enable this could include:
-
Changing the legislation on requirements such as preservation, revaluation, scheme
funding, employer debt and the Pension protection Fund levy so that they applied
only in respect of statutory provisions and benefits that were required to be paid
under scheme rules, not in respect of the discretionary elements;
-
Reviewing governance requirements to ensure employers, trustees and scheme
managers were properly equipped to deal with such discretion;
-
A ‘statutory override’ to enable schemes to change rules in relation to future accruals
more easily.46
Automatic conversion to DC for early leavers
In this scheme design, active scheme members would build rights to pension benefits during
a period of employment as now. However, if they left the employment before retirement, the
amount of pension accrued in the scheme would be crystallised and the cash value
transferred to a nominated DC fund. The Government considered that a number of
safeguards would need to be put in place: employees would need to have a clear
explanation of how accrued benefits were valued at crystallisation; there would need to be
regulatory protection for members; and measures address risks of avoidance activity, such
as prescribing the time by which employers would be required to calculated and transfer
benefits when a member leaves employment.47
Ability to change scheme pension age
The Government proposed to give employers greater flexibility to manage risks by adjusting
their normal pension age:
43Ibid
p17
In a cash balance scheme, the employer specifies the pension fund amount for the member for each year they
work, so the size of the member’s overall pension fund is defined, with the actual value dependent upon the
revaluation factor specified in the scheme rules. When the member retires the total pension fund is then
available for the purchase of an annuity. (Cm 8478, p31)
45 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013
46 Ibid p19
47 Ibid p20-21
44
13
35. This would enable future pension provision to be based on the projected number of
years in retirement, rather than being tied to a fixed age that does not take into account
changes to longevity. From the date the model is implemented, the age at which
members are entitled to the full scheme pension could be adjusted in line with changes
to longevity assumptions, so that members would be expected to spend broadly the
same length of time in retirement, regardless of changes to life expectancy. 48
To enable this, the Government proposed to make it easier for schemes to link their normal
pension age with the State Pension age if they chose, but also to require the Government
Actuary’s Department to publish, at predetermined intervals (say every three years) an
objective index on pension ages based on the latest longevity assumptions.49 Pensioner
members would not be affected, and there would need to be protection for those closest to
retirement – for example, a prohibition on changes affecting people already within ten years
of the scheme’s existing normal pension.50 Numerous respondents to the consultation
thought it was already possible to adopt this scheme design under current legislation.51
Responses
EEF said employers who had gone through the difficult process of closing a DB scheme
were unlikely to consider another form of DB in future:
The future of workplace pensions therefore is one where DC schemes will be the
predominant workplace pension platform. The reasons why employers have chosen
DC schemes are the costs and liabilities incurred in offering DB schemes.
Many EEF members have closed their DB schemes in recent years, and others are on
a flight-path towards closure. Their views provide a useful barometer of the
consultation proposals. For employers who have firstly incurred a sharp increase in
their liabilities for a DB scheme, and then gone through the very difficult process of
closing such a scheme, they are very unlikely to consider in the future another form of
DB scheme.
In addition, they will be unlikely to consider a different form of DC scheme which
exposes them to a future liability, particularly if that liability cannot be quantified and
limited. In discussions with our members then, we have not found any desire for a
model of risk-sharing, where the employer shoulders any liability for a defined level of
future retirement income.52
However, the National Association of Pension Funds (NAPF) argued that deregulation might
encourage some existing providers to keep DB schemes open for longer:
[…] it is unlikely that we will see a dramatic revival of DB pensions as employers
increasingly shift investment, inflation and longevity risks off their balance sheets.
However, ambitious deregulation of DB pensions might encourage those currently
considering closing their DB schemes to new members or to future accrual to keep
their schemes open for longer or switch to more innovative risk-sharing models.53
48
Ibid p22
Ibid p23
50 Ibid p 24
51 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, 24 June 2014, page 34
52 EEF response on reshaping workplace pensions for future generations - summary
53 NAPF, Reshaping workplace pensions for future generations – the NAPF’s response, December 2013
49
14
Trade unions were sceptical that this would be the result and were concerned about the
impact on scheme members. The TUC said:
Employers willing to accept pensions risk already have many ways to negotiate
changes to reduce costs, and we are particularly opposed to abolishing indexation as
that just means pensioners getting poorer every year. 54
The Government’s response
In June 2014, the Government said it would not proceed with the proposals for flexible DB:
It was clear that there are already flexibilities available to employers, such as linking
the scheme’s normal pension age with State Pension age, to reduce cost and volatility
without the need for new legislation. We have therefore considered the consultation
responses and have concluded that introducing new legislation, to make it easier to
sponsor DB schemes, will not be our priority at the present time.
Separate research findings have shown that, to make enough of a difference to
employers, the suggested changes would need to apply to accrued pension rights. We
are absolutely clear that we will not be making changes that affect past accruals that
could reduce the pension benefits that individuals have already built up with their
employer.
The view most respondents expressed was that the greater prize was to deliver
changes that enable collective schemes and greater ability to share risks in the DC
world.55
4
Proposals for providing greater certainty within DC
DWP research on consumer perspectives on defined ambition found that the concept of
providing greater certainty held an overall appeal. However, when specific models were
discussed, questions were raised around issues such as cost.56
Research by NEST also found a strong bias among savers for certainty. It said:
Everyone understands that the goal of a pension is to grow their contributions but
people are less clear where this growth will come from.
Many people expect their pensions to grow in a uniform upward fashion.
People in a pension scheme struggle to picture what happens to their money or where
it actually goes.
For unpensioned workers retirement planning is about safety and securing the future,
and therefore at odds with ideas of chance, risk and uncertainty.
For the automatically enrolled member risk is inherently negative and is more to do
with the chance of making a loss than making a gain.
TUC welcomes paper on defined ambition, 7 November 2013; UNITE, ‘Response to Reshaping workplace
pensions for future generations’, December 2013; See also NASUWT, Consultation response, Reshaping
workplace pensions for future generations, 19 December 2013
55 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, page 28
56 Defined Ambition: Consumer perspectives. Qualitative research among employers, individuals and employee
benefit consultants, DWP RR 866, June 2014, Executive summary
54
15
Similarly, uncertainty is always perceived in a negative light and suggests the
possibility of a disappointing or worst-case scenario outcome, rather than the
possibility of getting a better outcome than expected or even just slightly less. 57
As part of the Government’s work on this issue, an industry working group considered a
number of models, in particular: a money back guarantee; capital and investment return
guarantee, retirement income insurance and pension income builder.58 As the Pensions
Policy Institute has pointed out, a common feature of these models (and of collective DC) is
that none place any risk on the employer. In each case, the employer would determine their
level of contributions into the scheme but take no further risk.59
4.1
Money-back guarantee
Model 1 - Money-back guarantee is intended to ensure that the amount of accumulated
savings at retirement did not fall below the nominal value of contributions made to the
scheme. In practice, the probability of such a low level guarantee being exercised were
small. However, the Government said it was unlikely that the market would offer this sort of
guarantee and that government intervention did not seem justified:
66. From the supply side, it is clear that at present UK insurers have little appetite for
providing guarantees. The ABI in their recent publication, Identifying the Challenges of
a Changing World, questioned whether customers would be prepared to meet the
premium required to provide guarantees. They also raised concerns about increasing
pressures from conduct and prudential regulators to avoid policyholder detriment.
67. On the money-back guarantee model, we have considered whether the
Government should intervene directly and concluded that, in light of the significant
hurdles that would need to be negotiated, we cannot justify direct Government
intervention in providing money-back guarantees. We will however, continue working
with providers, who have modelled the possibilities and found some market-based
models affordable.60
Its consumer research found that although the principle of a ‘money back guarantee’ was
initially greeted with enthusiasm by risk-averse individuals, on reflection they thought that
“such a guarantee suggested that the pension scheme was a poor investment.” Concerns
were also expressed about “the likely cost and who would pay.” 61
In its response to the consultation, the Government said this model could operate within the
new DA space. However, it did not intend specific legislation to enable it:
In the consultation paper we explored options for delivery by both the market or by the
public sector and we rejected the latter. Consultation responses also confirm that the
case has not been made to legislate for the regulatory enablers that have been
suggested make market provision easier – such as including a safe harbour for
trustees, employers and providers against mis-selling or compulsion, or money back as
a default fund. Our conclusion therefore is not to change legislation or bring in new
legislation specifically to address these issues or offer public sector provision for this
NEST, Pensions insight – 2014
Cm 8710, chapter 4
59 PPI, Defined Ambition in workplace pension schemes, December 2013
60 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p42
61 Defined Ambition: Consumer perspectives. Qualitative research among employers, individuals and employee
benefit consultants, DWP RR 866, June 2014 section 5.1
57
58
16
model. But a money-back model could operate within the new DA space if there was
sufficient demand and supply appetite.62
4.2
Capital and investment return guarantee
The second model - capital and investment return guarantee – is intended to offer
guarantees at the mid-point of the pension cycle: when a member had built up a sum and
was concerned to protect the loss of capital, while still maintaining a need to grow the fund
further. The guarantee would be purchased by a fiduciary on behalf of the member to secure
a guarantee against part of the capital and possibly the investment return, for a fixed period.63
Consumer research found this principle was seen as attractive only by individuals who were
highly risk averse. As with the money back guarantee, questions were raised by individuals,
employers and consultants regarding:

How would the guarantee work in practice – a one-off or an on-going
premium?

How would the guarantee work if an employee moved jobs and pension
schemes?

What impact would the cost of the guarantee have on investment returns? 64
The Pensions Policy Institute points out that guarantees come with a cost:
Guarantees may mitigate the investment risk borne by members of a DC scheme.
However, the guarantees must be paid for either by the employer or the members.
Some empirical analyses have found that the cost of providing capital guarantees can
be relatively cheap as they could cost less than 10 basis points of the assets
accumulated. However, this is only if some assumptions relating to minimum years of
contributions and a pre-set investment strategy are maintained throughout the accrual
period. Relaxing any of these assumptions could increase the estimated cost of
guarantees significantly. The guarantees also only relate to the size of the pension
fund and not the retirement income that the fund will generate. 65
Unite argued that promoting guarantees could have negative effects. It argued that a better
way of building member confidence would be to increase employer contribution rates and
take action on charges:
The best means of building member confidence is to ensure that members achieve a
strong return relative to the contributions that they pay themselves through a high level
of employer contribution and a favourable ratio between employee and employer
contributions. The level of employer contributions required under auto-enrolment needs
to be revisited at an early date.
A further important contribution needs to come from a drive to reduce charges and
encourage the development of larger scale schemes which would have the potential to
progress some risk-sharing as between members.
62
DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p13
63 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p32
64 Defined Ambition: Consumer perspectives. Qualitative research among employers, individuals and employee
benefit consultants, DWP RR 866, June 2014 section 5.2
65 PPI, Defined Ambition in workplace pension schemes, Briefing Note Number 65, 22 December 2013
17
The demand for guarantees may be perceived as being greater for those on lower
incomes and with smaller pension contributions who may naturally be more risk
averse. Promotion of guarantees could amount to encouraging a new form of ‘reckless
conservatism’ which will only serve to widen the disparity in pension outcomes
between those in this group and those who have higher incomes and pension
contributions. The cost of guarantees could be seen as going against the general
thrust of policy to reduce the charges which members face. 66
In its response to the consultation, the Government said detailed design features should be
worked out within the new legislative framework:
In the consultation document we identified some design issues which included: the
ability of the scheme to hedge the guarantee; the potential for this product to operate
on a cohort basis; cost of the guarantee; and whether it would fit with the tax regime.
The intent is that the more detailed design features should be worked out within the
legal parameters of the new legislative framework.67
4.3
Retirement income insurance
The third model - retirement income insurance – would involve a fiduciary using a portion of
the member’s fund to buy, on the member’s behalf, an income insurance product that insures
a minimum level of income, which would grow each year as further insurance was
purchased. At retirement, the saver draws their pension from the fund and only if their fund is
only reduced to zero does the income guarantee kick in. Products of this type already existed
in the United States. However, the Government thought it was unlikely that this model would
be introduced in the UK in the short to medium term. Reasons for this included:

It requires insurers to be willing to offer standardised and transparently-priced
products. All else being equal, the greater price pressure exerted by this
approach makes it less attractive to insurers. In the US, the scale of the plans
on which this insurance is sold compensates insurers for the relatively low
prices.

Scale is a significant barrier. As it works in the US, a panel of insurers
competes to supply standardised income insurance. In such an arrangement,
insurers typically want to deal with plans with large enough asset bases to
make the business profitable for them. The fragmented nature of the UK
market means that this scale is not achieved. It may work on a smaller scale
but only if business was limited to one insurer – in which case the benefits of
competitive pressure on pricing disappear, with the outcome being worse for
members.

Prudential regulation of insurance companies is more exacting in the UK than
the US and, combined with the costs of hedging such insurance, these
products end up costing significantly more in the UK than the US, for the same
level of guarantee.

There is an administrative burden to this proposal since it involves significant
data requirements: at a minimum, insurers need data over time on members’
ages, fund choices, contributions and incomes drawn from the fund.68
66
Unite, Response to reshaping workplace pensions, December 2013, p11-12
DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p13
68 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p32
67
18
4.4
Pension income builder
The fourth model considered was the pension income builder. This is similar to the Dutch
General Practitioners’ pension fund and the mandatory ATP scheme in Denmark). In this
model, contributions are used for different purposes. A proportion is used to purchase a
deferred nominal annuity each year, payable from pension age. The residual proportion is
invested in a collective pool of risk-seeking assets:
35. In this model contributions are used for two different purposes. A proportion is used
to purchase a deferred nominal annuity, payable from the current pension age. For
every year of contributions each individual has a pension made up of a series of these
deferred annuities. Thus the individual can see their pension income increasing over
time (albeit at different rates depending upon the cost of each year’s deferred annuity,
which varies in line with market interest rates and market expectations of future
longevity).
36. The residual proportion of contributions is invested into a collective pool of riskseeking assets along with the residual proportions of other scheme members. This
could be done on a single collective basis or among smaller cohorts (although these do
need to be large enough to allow for enough variation in investment experiences
among members such that there is potential for smoothing). This pool is used to
provide future indexation on a conditional basis, with rights adjusted by way of bonus
allowances based on the financial status of the scheme.
37. As a result the individual has a degree of pre-retirement certainty over their
retirement income and can always see some benefit for each additional year of
contributions, as the guaranteed element increases (although clearly the cost of an
additional year’s annuity may vary, potentially affecting the individual’s perception of
value for money). In general this year-on-year increase should be confidence-inspiring
for members.69
DWP noted that this model entailed genuine risk-sharing. However, it needed to operate at
large scale for some of the key benefits to be realised and the issue was how to achieve this
in the UK. Possibilities included a multi-employer scheme or single employer with a large and
relatively stable workforce.70 Other issues for consideration included: who would stand as
guarantee provider; how to balance the interests of different cohorts of members and the
requirement for a strong governance framework and regulatory oversight. It was also
legitimate to debate whether members would be better served using their contributions to
seek higher returns. However, it could address the desire of consumer for greater certainty.71
Unite thought that, of the four models outlined for providing an element of guarantee through
a conventional DC vehicle, the pension income builder had the most potential to produce
beneficial outcomes for members. However, it thought collective DC was the most promising
proposal overall.72
5
Proposals for collective benefits
The Government has considered Collective Defined Contribution (CDC) schemes as a
possible structure for Defined Ambition. Its model for this is drawn from the experience of
69
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013 p7 and chapter 4; See
also, Lars Rohde, Using a Hybrid Pension Product in a Collective Framework to Distribute Risk: Denmark’s ATP
in Governance and Investment of Public Pension Assets, The World Bank, 2011
70 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013 p39-40
71 Ibid chapter 4
72 Unite response, Reshaping workplace pensions, December 2013, p12
19
occupational pension provision in the Netherlands. While its proposed model would have
important differences – it is not proposing compulsory participation for employers in industrywide schemes, for example – it has looked at what positive lessons can be learned from the
Dutch system. Key features of the schemes are that they feature risk-sharing between
members and cost certainty for employers through a fixed contribution rate.73
5.1
Occupational pension provision in the Netherlands
The Dutch pension system has three pillars. The first pillar is the state old age pension
(AOW), the second is constituted by occupational pensions, and the third by individual
savings for retirement.74
In arrangements dating back to 1949, participation in the second pillar is mandatory for
employers where the government has agreed that it should be so, in response to a request
from a sufficiently representative portion of an organised industry or sector. 75 For employees,
participation is mandatory through their contract of employment. These arrangements have
resulted in extensive coverage, with more than 90% of employees covered by supplementary
funded pension schemes. They have also helped to ensure industry-wide funds with
sufficient economies of scale, enabling cost efficient management of schemes: more than
80% of active scheme members are in sectoral funds.76 The bulk of assets are managed by
non-commercial pension funds, which are legal entities separate from the employer. They
are usually trust-based, governed by employer and employee representatives.77
The dominant model originated from a pure DB system. However, whereas in traditional DB
the sponsoring employer generally stands behind the pension promise, in the Dutch model it
depends on returns in the financial markets, interest rates and inflation rates.78 An overview
of the system by the Dutch associations of pension funds explains:
The majority of the Dutch DB (Defined Benefit) pension schemes are in fact not pure
DB schemes, but are hybrid schemes. This means that if a fund gets into financial
difficulties, all parties involved, employer, employees and those drawing their pension,
contribute to the recovery.
> The pension contributions can be increased. This will increase the wage
costs for the employer and decrease the net salary for the employee. Another
option is that the employer commits paying the extra contributions required to
incidentally pay an extra contribution.
> The indexation can be limited. Most pension schemes include a clause
stating that indexation is conditional. Each year the pension fund’s executive
board will decide whether the fund’s financial position will permit indexation of
the pensions and accrued rights. In indexed average salary schemes such
indexations constraints affect pensioners, members still contributing and early
leavers.
73
DWP, Reinvigorating workplace pensions, Cm 8478, November 2012, p39
For more detail, see OECD, Pensions at a glance 2013: country profiles – the Netherlands;
Dutch Association of Industry-wide Pension Funds and Dutch Association of Company Pension Funds,
The Dutch Pension System: an overview of the key aspects, 2010
75 O.W. Steenbeck and SG Van der Lecq, Costs and Benefits of Collective Pension Systems, 2007, chapter 10
76 Lans Bovenberg, Roel Mehlkopf and Theo Nijman, The Promise of Defined-Ambition Plans Lessons for the
United States, Network for Studies on Pensions, Aging and Retirement, March 2014
77 OW Steenbeek and S.G. van der Lecq eds, Costs and Benefits of Collective Pension Systems, 2007
78 Broeders D and Ponds E, Dutch pension system reform – A step closer to the ideal system? CESifo DICE
Report 3/2012, 65-78
74
20
> An extreme measure is to reduce the pension rights.
In many pension schemes the contribution amount as well as the level of indexation
depends on the coverage ratio. This is known as intergenerational risk sharing for
pension funds. Furthermore, when determining the investment mix a balance must be
found between the needs of those drawing a pension for security and on the other
hand, the needs of the younger contributor for the opportunity to achieve a good return
on investment.79
The effect of these arrangements is that investment and longevity risks are borne collectively
rather than by the individual. If a scheme becomes underfunded, its governing body decides
how to restore it to a full funding position over a period of three years (extended to five
recently). The minimum funding level is 105% (i.e. assets exceed liabilities by 5%). In
addition, the fund must have buffers to be able to cope with financial setbacks. The average
pension fund needs to be 125% funded, with the exact level dependant on factors such as
the scheme’s investment strategy and the age profile of its members.80
In general, scheme participants are treated uniformly. This means that scheme members
accrue benefits at the same rate (around two per cent of salary a year), all active members
contribute at the same rate and the indexation rate is the same for all participants, although
some funds differentiate between active members and retirees.81 Contribution rates are high,
as are the benefits provided. In 2012, the average contribution rate was about 17.5% (6.2%
from employees and 11.3% from employers). In 2013, schemes typically aimed at an annuity
level of about 80% of average pay (including the AOW) after 40 years’ service. 82
Reforms have been introduced over time in response to funding pressures. In 2003, there
was a shift to providing pensions based on career average rather than final salary, and the
introduction of a conditional indexation mechanism, whereby accrued rights would only be
increased in line with inflation if the scheme was fully funded.83
Further reforms have been under consideration following the financial crisis in 2007-08, when
the funding level fell in many schemes. A fall in the total funding from 130% to 95% in 2008,
meant many funds had to put in place recovery plans and take action to restore funding
levels.84 A recent academic study explained the effects:
The biggest wave of cuts in pensions in payments occurred in 2013. During that year,
68 pension funds (out of 415) were required to cut nominal pension rights. The cuts in
2013 affected around 2.0 million active participants (who pay contributions), 1.1 million
retired participants and 2.5 million inactive participants who neither pay contributions
nor receive benefits.[…] Around 2 million participants faced a relatively large cut of 6 to
7 per cent. A cut of 7 per cent is observed frequently because the Dutch government
allowed pension funds to cap the level of pension cuts in 2013 at 7% and defer the
remainder to 2014.
79
Dutch Association of Industry-wide Pension Funds and Dutch Association of Company Pension Funds,
The Dutch Pension System: an overview of the key aspects, 2010
80 Ibid
81 Broeders D and Ponds E, Dutch pension system reform – A step closer to the ideal system? CESifo DICE
Report 3/2012, 65-78
82 Lans Bovenberg and Raymond Gradus, Reforming Dutch occupational pension schemes, 2014
83 Theo Nijman, Pension Reform in the Netherlands: Attractive options for other countries? Bankers, Markets and
Investors No 128, January-February 2014
84 IMF Country Report No. 11/209, July 2011 - Netherlands: Publication of Financial Sector Assessment Program
Documentation - Technical Note on Pensions Sector Issues
21
Moreover, most pension funds have been unable to provide (full) indexation in recent
years. […] on average retirees have experienced a decline of around 10% of their
replacement rates as a consequence of inadequate indexation. This decline is
expected to increase further because the current low funding rates will not allow
pension funds to provide full indexation in the near future.85
Funding levels have since recovered somewhat and were expected to reach an average of
112% in May 2014.86 Thirty funds had to curtail pensions in April 2014, affecting 200,000
retirees, 300,000 members and 600,000 early leavers (people with non-contributory
entitlements that remain with previous employers).
These difficulties led to proposals for reform. In 2010, the social partners - employers and
trade unions - agreed in a Pension Accord that pension contracts needed to be modified.87 In
particular, it was agreed that:
-
unexpected increases in life expectancy should be met by changes in pension rights
rather than in recovery contributions paid by employers and workers;
-
the new pension contracts should be transparent and complete and pension funds
should communicate to participants the risks implied by the pension contract
(including investment policies); and
-
eligibility for the public pension (AOW) and the accrual rate in occupational pensions
would be linked to life expectancy.88
It appears that the proposals to move towards a new ‘defined ambition’ contract are still
under consideration, with complex issues, such as whether the new contracts should apply to
accrued rights and the extent to which pension funds should offer nominal guarantees, as yet
undecided.89
5.2
Proposals for the UK
In its November 2013 consultation document, Reshaping workplace pensions for future
generations, the Government said that some employers currently sponsoring DB schemes
were interested in CDC as an alternative.90 It set out the core characteristics of the models
under discussion for the UK. These included:
-
A fixed rate of employer contribution, with the employer having no further liability to
the scheme (unless it chose to support it further) and no balance sheet risk;
-
Rather than being retained in an individual fund for each member, or each member
having rights to their own specific contributions and investment returns attributable to
those contributions, in a CDC scheme assets are pooled. When they retire, members
do not select an individual retirement income product, rather the income is paid from
the asset pool. The rights of a CDC scheme member are therefore not related to the
contributions made by or on behalf of that member;
Lans Bovenberg, Roel Mehikopf and Theo Nijman, The Promise of Defined Ambition Plans – Lesson for the
United States, Netspar Occasional Papers, March 2014
86 ‘Dutch pension funds at three-year high as ratios improve’, Financial Adviser, 26 June 2014
87 Stichting van de Arbeid, Memorandum Detailing the Pension Accord of 4 June 2010
88 Lans Bovenberg, Roel Mehikopf and Theo Nijman, The Promise of Defined-Ambition Plans – Lessons for the
United States, Netspar Occasional Papers, March 2014, Section 6
89 Ibid
90 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013
85
22
-
Large scale provides for efficiencies in the costs of administration and investment
management. It also enables the collective element to function more efficiently – “very
simply, for a scheme that shares risks among members, the more members there
are, the greater the opportunities for risk sharing”;
-
In one of the main models of the scheme, individuals are provided with a target
pension income they might receive in retirement (often including a fluctuating
conditional indexation payment). The actual pension income received is dependent
on the available assets in the scheme. If funding is insufficient, there are a number of
pressure valves to enable the scheme to continue to deliver benefits, such as not
paying the conditional indexation element or reducing the target pension income for
members, with a decision to be made on how risks are shared between different
classes of members;
-
One form of CDC includes the possibility of benefits in payment being reduced in
order to manage the fund. An alternative would be to fix a core part of the pension
which cannot be changed once it is in payment, so it would be only the conditional
indexation payments that could be cut.91
In its response to the consultation published in June 2014, the Government said that such
schemes were currently not catered for in pensions or tax legislation. It would therefore
define collective schemes in primary legislation and create a framework for them:
Evidence suggests that collective schemes provide a greater degree of stability in
pension incomes than individual DC, because demographic and financial risks are
pooled across the membership. In recognition of this, the responses received during
the consultation period were largely positive.
Collectives are not currently possible in the UK in practice because they are not
catered for in either pensions or tax legislation. The Department for Work and
Pensions has had discussions with Her Majesty’s Treasury (HMT) and Her Majesty’s
Revenue and Customs (HMRC) to examine this issue. In order to enable collective
schemes that are run safely and regulated appropriately, we propose to define benefits
provided on a collective basis in primary legislation for the first time.
We will create a framework that draws on the experiences of other countries where
collective schemes operate and places the interests of members firmly at the heart of
that design, prioritising clarity and transparency.
Collective schemes are complex and can be opaque – because of the indirect
relationship between contributions and benefits. This necessitates strong standards of
communication and governance. We intend collective schemes to be overseen by
experienced fiduciaries acting on behalf of members, taking decisions at scheme level
and removing the need for individuals to make difficult choices over fund allocations
and retirement income products.
We will also introduce a robust regulatory regime in respect of targeting benefits and
internal accounting, providing regulators with the appropriate mandate and tools to
supervise schemes properly. We believe it is crucial that members fully understand the
risks associated with collective arrangements when they join the scheme, and while it
is not for the state to determine the benefit design of these schemes, we will ensure
that schemes set out clearly (to members) in advance how their rights are defined,
91
Ibid, p45-6
23
what they can expect from the pool, and how positive and negative shocks will impact
on their pension benefits.
Collective schemes, as with all DC arrangements, do not come without risk, but with
proper standards of governance and a suitable regulatory regime, we believe that we
can mitigate these appropriately. A definition of collective benefits and associated key
requirements will be included in the Pensions Bill while secondary legislation is likely to
include more detailed provisions in relation to areas such as benefit targeting, risk
management, communications and governance.
The legislative measures we will introduce will not address tax rules; however we will
continue to work with HMRC and HMT to consider how collective schemes would
operate within the pensions tax regime.92
5.3
Debate
Differing views on the possible advantages and disadvantages to providing pension benefits
on a collective basis are discussed below.
Outcomes
An assessment of how CDC schemes might work in the UK conducted by the Labour
Government in 2009 found that CDC schemes could produce higher pensions and greater
stability in outcomes for individuals:
-
In the median case, CDC schemes produced higher pensions than standard DC
schemes. This was mostly due to the fact that CDC schemes could remain invested
in equities throughout the entire accumulation period, whereas typical DC schemes
tended to move into safer, but lower-returning assets as the member approached
retirement.93
-
There was greater stability in outcomes for individuals i.e. an individual’s starting
pension was less dependent on whether they happened to retire in a downturn or a
boom. However, there was uncertainty about indexation throughout retirement, as it
was only granted when investment returns permitted. 94
A report published by the RSA in November 2013 included modelling to show that:

On the best like-for-like comparison, a collective pension would on average
have outperformed an individual pension by 33%

That in 37 of the past 57 years, a collective pension would have outperformed
the individual pension

That the variability of the pension, and thus the risk the saver would have
taken, would be lower with a collective rather than an individual pension. 95
Modelling for the current Government showed CDC to out-perform individual DC. This was
primarily driven by lower costs and remaining for longer in risk-seeking assets, factors not
necessarily inherent to CDC:
92
DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014
93 Ibid para 3.2
94 DWP, Collective Defined Contribution Schemes – An assessment of whether and how such schemes might
operate in the UK, December 2009
95 David Pitt-Watson, Collective Pensions In the UK II, RSA, November 2013
24
14. There is a lively debate within the industry around the theoretical benefits of CDC
plans compared to individual DC plans; in particular, the extent to which CDC
outperforms DC. This was explored by the DWP and GAD in 2009. The modelling
indicated that there was a good likelihood of better outcomes compared to individual
DC, although this arose from CDC following a more aggressive investment strategy
over time, which is not inherent in the design, and the same strategy could be
replicated in DC. It also indicated that a stable active membership was required to
keep the scheme sustainable. The modelling also indicated this effect was radically
diminished where there was no continuing stream of ne member contributions.
15. As part of the Department’s current work on CDC, consultants Aon Hewitt have
modelled the position of an individual who for 25 years set aside 10 per cent of their
salary for a pension. It then looked at how they would have fared had they retired in
1955, and then in every other year up until the present.
16. The median of the average salary replacement has been compared for the
13following; (i) a CDC plan invested 80 per cent in equities and 20 per cent in bonds;
(ii) an all equity individual DC plan; and (iii) a lifestyle individual DC plan. In Aon’s
results the average replacement rate for the CDC plan is 32 per cent, for DC equity it is
27 per cent, and for lifestyle it is 22 per cent. The dispersion of the individual DC plans
is significantly greater than for the CDC.
17. Our understanding is that out-performance is driven primarily by lower costs and
remaining invested for longer in risk-seeking assets. Neither of these is inherent to
CDC schemes and it is possible to achieve both low costs and to hold risk-seeking
assets for as long as desired in individual DC schemes. 96
However, it said the ability to share risks amongst members did seem to create more stable
outcomes than are possible in individual DC: and the greater the ability to share risk and so
the lower the dispersion in outcomes.97
Viability of CDCs in the UK
When the Labour Government looked at this in 2009, it decided to take no further action. Part
of the reason for this was that it thought demand for employers would be low:
[…] employers (including DB scheme sponsors considering closing their schemes)
seem to be reluctant to subscribe to a new type of pension scheme which their
employees may not fully understand and remain sceptical of their potential liability if
investment performance is poor.98
However, in November 2013, the current Government said some employers were interested
in CDC as an alternative to DB:
We know that some DB employers are interested in CDC as an alternative to DB
schemes, rather than moving to individual DC schemes. CDC schemes may also be
feasible as multi-employer schemes, perhaps sector based as in the Netherlands.
Longer term, once established they might enable smaller employers to participate,
offering them and their employees the benefits of scale.99
It commented that CDC schemes perform better on a larger scale. This is because:
96
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p46
Ibid para 18
98 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p12
99 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p44
97
25
Scale can provide the potential for efficiencies in the costs of administration and
investment management. However, these advantages apply equally to other forms of
pension scheme, and it is important to note that while CDC needs scale, it does not
provide it automatically. The other benefit of scale for CDCs is that it enables the
collective element to function more efficiently – very simply, for a scheme that shares
risks among members, the more members there are, the greater the opportunities for
risk sharing.100
The Pensions Policy Institute has suggested that intervention by industry or Government
may be needed for sufficient scale to be achieved.101
There may also be cultural barriers to their introduction here. Morten Nilsson, CEO of Now:
Pensions, has pointed out that such schemes in the Netherlands and Denmark operate in a
very different context:
Whilst innovations such as collective DC schemes have been successful in Denmark
and the Netherlands, both of these markets are highly unionised and have had
mandatory or quasi mandatory pension saving for many years. The populations are
relatively homogenous and the collective DC schemes operate on an occupational
basis with people from similar professions sharing risk with one another – a much fairer
approach than manual workers sharing risk with white collar workers. The UK is a
much more fragmented market and while changing legislation to allow these schemes
could have merit, in many ways it feels as though we are running before we can walk.
Like it or not, UK companies have limited appetite for pension liabilities and consumers
have limited interest in locking themselves up in risk sharing arrangements. As the
market grows and matures, this position might alter but I think we have some distance
to travel.”102
Intergenerational equity
A number of commentators have objected that CDCs are unfair to younger contributors. Huw
Evans of the ABI, has said, for example:
CDC can hit the young. CDC schemes work by sharing risks between all members,
pooling the investment in one fund. This brings down overheads but involves
transferring risks from old to young, with younger scheme members bearing the risk of
reduced future payouts to ensure the benefits of older members are preserved. 103
The Government acknowledges this as a potential issue but points out that the way in which
risk is shared between different groups of members depends on how the scheme is
designed:
11. CDC schemes share risk between members. Scheme design governs which
members bear risk and how much of it. For example, in a scheme where the design
reduces the benefits of active and deferred benefits before it does so for pensioners,
the risk in relation to investment returns and funding position is borne to a greater
extent by younger members where the target is reduced. The variation on this design –
to make a promise on the pension in payment – would increase the element of
intergenerational risk transfer further. This intergenerational risk sharing, which arises
100
DWP, Reshaping workplace pensions for future generations, November 2013, Cm 8710, chapter 5
PPI, Defined Ambition in Workplace Pension Schemes. PPI Briefing Note 65, 2013
102 Now:pensions comments on pension proposals outlined in Queen’s speech, 4 June 2013
103 Huw Evans, Ten things you should know about CDC, ABI blog, 28 January 2014
101
26
from collectivisation, requires a considerable increase in the level of trust required from
members of those running these schemes in comparison to traditional DC. 104
This is borne out by recent analysis of proposals for reform of CDCs in the Netherlands,
which said:
Typically, in case of high funding ratios, the elderly benefit from excess indexation.
They also stand to gain from a higher discount and contribution rate. These measures
will increase pay outs in the short run. By contrast, at low funding ratios, benefit cuts, a
less ambitious indexation target and more prudence are favorable to the young. The
young stand to gain from benefit cuts at low funding ratios, greater prudence via more
buffering and a less ambitious indexation target, which will all reduce benefit pay-outs
in the short run.105
Uniform accrual rates and contribution rates, as in the Netherlands, can in themselves entail
a transfer from younger to older workers. For example, the contributions of a younger worker
participating in a scheme early in life will generate returns over a long period, whereas those
of an older worker will generate lesser returns. So, a younger worker who leaves the scheme
early to become self-employed might have gained more by saving in an individual DC
scheme, In contrast, an older worker who leaves their free-lance work to join the scheme
later in their career would benefit from the relatively low premium they were required to pay.
Questions about the fairness of this sort of effect are more likely to arise in a fluid labour
market. Consideration of possible remedies, such as age-related accrual rates or premiums,
would need to take account of equality legislation. 106
Compatibility with the Budget 2014 announcements
Others have questioned whether CDC would work in an environment where, following the
announcement in Budget 2014, individuals aged 55 and over have flexibility to draw their
pension saving as and when they choose, subject to their marginal rate of income tax.107
Responding to the Queen’s Speech, Shadow Pensions Minister, Gregg McClymont asked:
Finally, the Minister made great play of his defined ambition agenda, which is buried in
his statement. How can one develop the collective pensions to which he subscribes
when they depend on intergenerational risk-sharing? As we understand it,
intergenerational risk-sharing becomes extremely difficult, if not impossible, if people
exit the system at the age of 55.108
Craig Berry of the Sheffield Political Economy Research Institute, for example, said the risk
that a large number of savers could choose to take their money in a lump sum would make
the CDC business model unworkable on the kind of scale needed to make a difference:
The CDC business model depends, fundamentally, on retirees’ pensions being paid
directly out of the scheme’s funds, rather than via an externally-held annuity. This
means cash can remain invested in high-return assets right until the very moment it is
104
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013
D Broeders and E Ponds, Dutch pension system reform – A step closer to the ideal system? CESifo DICE
Report, 3/2102, 70DW
106 J B Kune, Solidarities in collective pension schemes, in O.W. Steenbeek and S.G. van der Lecq (Eds), Costs
and Benefits of Collective Pension Systems, July 2007; Lans Bovenberg and Raymond Gradus, Reforming
Dutch occupational pension schemes, 2014
107 HM Treasury, Budget 2014, March 2014, para 1.164-5
108 HC Deb 20 March 2014 c953
105
27
needed to be used to make monthly pension payments. It also means members must
be required to take their pension from the scheme rather than “shopping around”. 109
Towers Watson said people could be allowed to transfer their money out if the value was
adjusted first:
Portability and individual control were at the heart of the Budget reforms, but are called
into question with CDC. You can allow people to transfer out of a CDC fund, but that is
likely to mean adjusting the value of their savings first. How this is done must be
transparent and could prove controversial. It’s also unclear whether starting to receive
a CDC retirement income will be a big one-off decision that you cannot reverse, like
buying an annuity. If retirees can cash out their CDC pensions at any point, that could
play havoc with the longevity risk-sharing they are meant to provide.110
However, as Towers Watson also pointed out, there are possible implications for risk-sharing
between generations. One of the features of collective DC schemes is that if they become
underfunded, they take action to address this – for example, by increasing contribution rates,
reducing or suspending indexation or reducing pensions in payment. If members fear their
pensions may be reduced, they might be tempted to transfer their savings out of the scheme.
This would presumably be one of the factors a scheme would account of when deciding how
to restore scheme funding levels.
6
Pension Schemes Bill 2014/15
The Queen’s Speech on 3 June 2014 announced a Private Pensions Bill to:
Provide wider choice, with Defined Ambition pensions encouraging greater risk sharing
between parties and allowing savers to have greater certainty about their retirement
savings.
The main benefits of the Bill would be to:

Introduce new definitions in into the current legislative framework.

Encourage new forms of pension schemes that provide more certainty for
individual members about their pension than current Defined Contribution
schemes, which currently dominate the market, while limiting costs for
employers to realistic levels.

Enable ‘collective schemes’ that pool risk between members and potentially
allow for more stability around pensions outcomes in retirement.
The main elements of the Bill are:
General changes to Pensions Legislation
The Bill would make provisions for a new legislative framework in relation to the
different categories of pension schemes. It would establish three mutually exclusive
definitions for scheme type based on degree of certainty in the benefits that schemes
offer to members.
The Bill would define schemes in terms of the type of ‘pensions promise’ they offer to
the individual as they are paying in. A scheme would be categorised as a Defined
Benefit scheme, a Defined Ambition (shared risk pension) scheme or a Defined
109
110
Craig Berry, The Queen’s speech leaves pensions in a royal muddle, The Conversation, 4 June 2014
Towers Watson, Collective pensions are no magic wand, 4 June 2014
28
Contribution scheme, corresponding to the different types of promise – full promise
about retirement income, a promise on part of the pot or income, or offering no promise
at all.
Collective Benefits

Enabling ‘collective schemes’ that pool risk between members and potentially
allow for greater stability around pension outcomes. It would also contain a
number of measures relating to the valuation and reporting requirement for
collective schemes.
Rationale

Defined Contribution pensions – where individual scheme members bear the
risks of longevity, inflation and investment returns – currently dominate the UK
pensions market.

Defined Benefit pensions – where the employer bears the risks by promising a pension
usually related to salary – are in decline.

Defined Contribution pensions can be the right product for many savers, but outcomes
will be less certain and more volatile than those with Defined Benefit Pensions.

The Bill is needed to encourage new Defined Ambition pensions, in the middle space
between Defined Contribution and Defined Benefit pensions that share more of the
risk between parties.111
The Pension Schemes Bill 2014/15 was published on 26 June 2014. It had its Second
Reading on Tuesday 2 September 2014.112The Bill, Explanatory Notes and an Impact
Assessment can be found on the Parliament website.
1.1
The legislative approach to ‘defined ambition’
In November 2013, the Government said it proposed to create a specific DA space in
legislation. It would also define DB schemes in their own right. It hoped that the new
definitions would enable greater clarity about the requirements applying to the different types
of scheme:
3. Historically, pensions legislation has broadly classified schemes as either money
purchase or non-money purchase, with a money purchase scheme being one which
only offers money purchase benefits. Although money purchase schemes are
commonly referred to as DC, they are not defined as such in legislation.
4. With the introduction of DA there is the opportunity to recast the legislation,
distinguishing between DB and DA schemes in the non-money purchase space. We
therefore propose to create a specific DA space in the legislation, taking the
opportunity to move away from the polarity created by the existing definitions and
giving explicit recognition in legislation to the potential for innovation in risk sharing in
the middle ground.
5. At the same time, we propose to define DB schemes in their own right. With the
creation of new definitions of DA and DB schemes, distinct from each other and from
money purchase schemes, we can more easily provide clear and proportionate
111
112
Gov.UK,Queen’s Speech 2014 – what it means for you - Private Pensions Bill, 4 June 2014
HC Deb 2 September 2014 c195-250
29
regulation according to scheme type, giving clarity and reassurance to employers and
providers.
6. To enable schemes to evolve and change, we do not propose to create entirely new
and separate legislative regimes for the different types of schemes, but instead will use
the new definitions to help make clear the distinct requirements that apply to each type
of scheme. We see ease of transition as vital to make DA attractive to employers.
7. The aim would be to create a conceptual linkage for the different types of pension
scheme that would fall within the DA space and set out the common requirements that
recognise their characteristics as distinct from DB and money purchase schemes.
8. It would represent a shift in the legislation, setting out an approach based on the
scheme as a whole. This could encourage innovation and act as a greater incentive for
schemes to offer a mix of benefits. It would also provide a very clear space for us to set
out the characteristics of being a DA scheme, and make it easier for existing schemes
to change shape in relation to future accruals.113
A change in the status of schemes would result in schemes becoming subject to different
requirements.114
It said that for DA schemes issues such as governance, member communications and
funding would need special attention:
[…] We believe that the areas of governance, member communications and funding
will need special attention, because in DA schemes where some benefits may be
discretionary or where the outcome for the member is less certain than in DB schemes
but more complex than in money purchase schemes, there will be new responsibilities
for the trustees or those running the schemes, and a need to explain to members
clearly what the benefits and risks of the schemes are, and what any guarantee
means.115
In terms of governance, it said:
[…] there could be a case for introducing requirements to ensure that where there is
discretion in a scheme, trustees or scheme managers give proper and regular
consideration to the exercise of that discretion.
35. In addition, given the extra responsibilities on those running such schemes, there is
a strong case for imposing different requirements to reflect the greater emphasis on
discretion and risk sharing – for example in relation to the levels of knowledge and
understanding required and internal controls and processes. There may also be a need
to make clearer the expectations about how trustees should manage DA schemes as
long-term propositions – with appropriate mechanisms for allowing schemes to
evolve.116
For communications, it said that the nature of DA schemes might mean there was a clear
case for a specific set of information requirements. This was because they offered a degree
of guarantee but not absolute certainty, so the “nature of the pension promise may be harder
to understand and more complex to communicate without being misleading.”117
113
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p50
Ibid, p55-6, para 43-6
115 Ibid, p54 para 33
116 Ibid p55, para 34
117 Ibid p55, para 37
114
30
As regards funding requirements, the element of guarantee inherent in DA meant there
would inevitably be some degree of overlap with DB schemes in relation to scheme funding
requirements. However, the requirements would depend on the extent of any promise or
guarantee and who stood behind it:
41. Schemes which make a promise in relation to the benefit will need to be funded to
be able to meet that promise, but funding requirements should only apply to the extent
of the promise or guarantee, and the nature of the funding obligation will depend on
who is standing behind the promise.
• An employer-sponsored occupational pension scheme which offers a salaryrelated pension with discretionary indexation would need to be funded in
accordance with the current scheme funding requirements which apply to
occupational pension schemes, equal to the technical provisions – but only to
the levels needed to cover the basic pension liability.
• A Regulatory Own Fund vehicle offering deferred annuities and discretionary
benefits would need to be funded to the level required to meet the discounted
capital value of the liabilities (technical provisions) plus an appropriate buffer.
42. Where the employer stands behind the promise in an occupational pension
scheme, Pension Protection Fund protection and employer debt obligations would
continue to apply as now. These provisions will however need amendment to reflect
the different structures of DA schemes and to take account of altered employer
obligations. While Pension Protection Fund levies would continue to apply, they would
need to be calibrated to reflect the liability accruing as a result of the given promise. 118
The Government also set out its thinking in relation to ongoing initiatives in relation to DC
scheme quality, automatic transfers and auto-enrolment:
[…] the Government is keen to ensure that there are appropriate minimum standards
for workplace DC schemes – particularly as they will be heavily used for automatic
enrolment.
52. However, requirements that might be applied to money purchase schemes, such
as bans or caps on certain types of charge currently being consulted on will not
necessarily be appropriate for DA schemes in the same way. This reflects the fact that
a partial guarantee offers a degree of protection over pot erosion and that DA schemes
may be more complex (and hence involve additional cost).
53. In a similar vein, and given the potential variety of DA schemes, we anticipate we
would not necessarily propose to impose the same quality standards on DA schemes
as those on which the Government issued its call for evidence in July, especially since
some aspects (such as governance) will be covered under specific DA requirements.
54. It is also our current intention that DA schemes would be outside any system of
automatic transfer (pot follows member) since this would involve transfers of
incommensurable benefits.
55. We will however, need to ensure that DA schemes are able to be qualifying
schemes for automatic enrolment purposes, which may require amendments to the
automatic enrolment legislation, certification guidance and regulations.119
In June 2014, it said it had made some changes to its proposed approach:
118
119
Ibid p55
Ibid p57. For more detail, see Library Note SN 6956 Improving outcomes for DC pension savers
31
We will continue, as intended, to establish mutually exclusive definitions for scheme
type based on degrees of certainty for members. We will also ensure proportionate
regulation by applying requirements to certain features – where there is a promise, for
example, ensuring it is funded – while still maintaining transparency in the law so that
employers are clear on the extent of their obligations. We are committed to avoiding
legislation that is overly prescriptive; instead, we want to allow schemes to evolve and
innovate.
Where we have deviated from the ideas set out in the consultation, we have put
additional safeguards in place to ensure the new schemes work to their full potential.
We are introducing a new definition of collective benefit, which could be offered under
DA or defined contribution (DC) schemes. We will refine the definition of DB scheme to
take account of certain discretionary features which already exist in some DB schemes
and broaden the definition of DC to cater for self-annuitising and CDC schemes (that
do not provide a promise or guarantee during the accrual phase). Money purchase
schemes will fall within the DC scheme definition. 120
The Bill creates a new category of “shared risk scheme (sometimes known as ‘defined
ambition’).
1.2
Part 1 – definitions
Historically, legislation has broadly classified pension schemes as either money purchase, or
non-money purchase.121 The definition in the Pensions Schemes Act 1993, as amended by
the Pensions Act 2011 provides that:
In order for a benefit to qualify as a money purchase benefit, the amount or rate of the
benefit must be calculated only by reference to assets which must necessarily suffice
to provide the benefit. If any other factor such as a guaranteed investment return or
other guarantee of the amount where used at any time to calculate the benefit, it is not
a money purchase benefit.122
The Government said amendment was needed following the decision of the Supreme Court
in Houldsworth vs Bridge Trustees. The Supreme Court had decided that that certain
benefits should be treated as “money purchase benefits” even though it was possible for
them to develop funding deficits.123 The Government said that the decision had created
uncertainty about the types of benefits that fell within the money purchase definition and that
amendment was needed in order to ensure scheme members were protected
appropriately.124 Following consultation, the details were provided for in two statutory
instruments.125
Part 1 of the Bill define three mutually exclusive definitions of pension. The definitions are
based on the type of promise the scheme offers members during the accumulation phase
120
DWP, Reshaping workplace pensions for future generations: government response to the consultation, Cm
8883, 25 June 2014
121 DWP, Reshaping workplace pensions for future generations, November 2013, Cm 8710
122 Pensions Act 2011 – Explanatory Note, para 157
123
The Supreme Court produced a press summary of the decision
124 Pensions Bill 2011 – factsheet 2 – Government amendments to the definition of “money purchase benefits”, 17
October 2011; HC Deb 13 October 2011 c46-8WS; SI 2014/1954 Explanatory Memorandum
125 The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014 (SI
2014/1954); The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations
2014 (SI 2014/1711)
32
about the retirement benefit (retirement income or a retirement lump sum provided to
members).126 Briefly:
-
A defined benefits scheme is one that provides a pre-determined retirement income
to all members, beginning at pension age and continuing for life. There must be a ‘full
pensions promise’ to members, which means that the level of benefit is determined
wholly by reference to that promise in all circumstances;
-
A shared risk scheme is one that offers a ‘pension promise’ but not a full pension
promise, to all members at some point during the accumulation phase in relation to at
least some of the retirement benefit that members might receive; and
-
A defined contributions scheme is one that gives no promise during the
accumulation phase in relation to any of the retirement benefits that may be provided
to members.
These are discussed in more detail below. The new definitions apply only where the
legislation expressly states that they should. They do not apply in any public service
pensions legislation (clause 1 (2)).
The new definitions do not require employers to offer DA models or to bear more risk. There
may be some costs for current schemes, arising from the need to assess how the new
definitions apply to them and identify themselves under the current framework.127
Defined benefits
In June 2014, the Government said it would “refine the definition of DB scheme to take
account of certain discretionary features which already exist in some DB schemes”.128
Clause 2 provides that a defined benefits (DB) scheme is one that provides a predetermined retirement income to all members:
This type of scheme provides a pre-determined retirement income to all members,
beginning at the scheme’s normal pension age or decumulation point and continuing
for life. This income is pre-determined insofar as it is set at a rate that is calculated
according to promised factors as stipulated in the scheme rules or other scheme
documentation. This is expressed as a ‘full pensions promise’ to members. The normal
pension age or earliest occasion for accessing the full benefits is fixed – that is, the
only way the age or period of accumulation can change is by change to the scheme
rules. Schemes where the normal pension age changes in line with state pension age,
without requiring a change to the scheme rules, are thus excluded. Also excluded are
schemes which apply a longevity factor to the benefit entitlement. 129
Clause 5 (1) provides that:
[…] there is a full ‘pensions promise’ provided to members, if, at all times before the
benefit comes into payment, there is a promise about the level of benefit that will be
126
Bill 12 EN, para 31
DWP, Pension Schemes Bill Impact Assessment. Summary of Impacts, June 2014, DEP2014-0911, p15-6,
para 23 and 31
128 DWP, Reshaping workplace pensions for future generations: government response to the consultation, Cm
8883, 25 June 2014, p40
129 Bill 12 EN, para 32
127
33
received and the level of benefit is determined wholly by reference to that promise in all
circumstances. The promise refers to a member’s retirement income, but may also
include the ability to withdraw a retirement lump sum at an amount that is set out within
the scheme.130
An example of a DB scheme is a salary-related scheme, providing benefits based on a
proportion of salary (whether final or career average) and length of service:
A salary-related pension scheme where the retirement income to be paid out is
determined according to a formula based on salary: for example, 1/80 x average salary
x years in pensionable service. The age or point at which this income can start to be
paid in full to members can only be changed by a change to the scheme rules.131
Key to the definition is the fact that there is a full pension promise i.e. that the member is
given complete certainty about the level of benefit they will receive in retirement. This means
that a scheme may be DB “regardless of its status as an occupational or personal pension
scheme and regardless of who stands behind the promise made by the scheme.”132
Clause 5 (6) provides that a benefit does not fail the test (of providing benefits determined
wholly by reference to the promise in all circumstances) just because the scheme confers
discretion to vary the benefit for reasons related to a member’s individual circumstances.
One example would be provision for early payment of a full pension on ill-health grounds - a
common feature of current DB schemes.133 There is regulation-making power to enable DWP
to further examine and consult on those discretions which should not impact on whether a
benefit is considered as having a full pensions promise. This is because:
Where a discretion is capable of being used only in relation to individual
circumstances, subsection 6 (a) provides for it to be disregarded so that this would not
affect the categorisation of a defined benefits scheme because there is still a full
pensions promise –for example, providing for benefits on grounds of ill health before
the normal pension age. However, there are also some wider discretions in some
schemes which could potentially affect whether a benefit meets the requirement under
subsection (1) (b).134
Shared risk
Clause 3 provides that a shared risk scheme is one that offers a ‘pension promise’, but not a
full one, in relation to at least some of the retirement benefit that members might receive. 135
Clause 5 (2) provides that for the purpose of shared risk and defined contribution schemes, a
pension promise is provided if:
[…] there is a promise to members during the accumulation phase, in relation to a
retirement benefit, about the level of benefit that will be received. The level is the rate
of the income or the amount of the lump sum (see clause 7). The promise must be
expressed at a time before the benefit comes into payment, but unlike under a defined
130
Ibid para 39
Ibid para 36
132 DWP, Reshaping workplace pensions for future generations: government response to the consultation, Cm
8883, 25 June 2014, p38
133 Ibid para 43
134 Clause 5 (6) (b); DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911
135 Bill 12 EN, para 32
131
34
benefits scheme, does not need to be expressed at all times before payment, i.e.
throughout the accrual phase.136
The Explanatory Notes explain that a shared risk scheme is one where some contributions
are used to purchase a deferred annuity or otherwise secure a promise about part of the
income that will be received in retirement:
A pension scheme into which the employer and employee pay contributions. These
contributions are then invested, and so the retirement benefit in part depends on how
those investments perform, but some contributions are used to purchase a deferred
annuity or otherwise secure a promise about part of the income that will be received in
retirement. The retirement benefit is a combination of that promise and the funds
accumulated via contributions and investment returns.137
A cash-balance scheme would also fall within this definition. This is because:
A cash-balance scheme gives its members ‘some form of guarantee but not complete
certainty on the level of income’, because:

the sum accrues on a defined basis;

the actual amount of income that the member will receive in retirement is
unknown because it will depend on market factors at the time the sum is used
to purchase an annuity. 138
A money purchase scheme with an element of guarantee would also be defined as a shared
risk scheme.139
Defined contributions
In June 2014, the Government said it would:
[…] broaden the definition of DC to cater for self-annuitising and CDC schemes (that
do not provide a promise of a guarantee during the accrual phase). Money purchase
schemes will fall within the DC scheme definition. 140
Clause 4 provides that a scheme is a defined contributions (DC) scheme if there is no
pensions promise in relation to any of the retirement benefits that may be provided to
member. For example:
A pension scheme into which the employer and employee pay contributions, which are
then invested. The retirement benefit depends wholly on the money contributed to the
scheme and the investment return, and potentially any pooling of risk between
members, and so the employee is given no certainty at all during the accumulation
phase.141
Meaning of pension promise
Clause 5 explains what is meant by a pension promise.
136
Ibid para 40
Ibid para 36
138 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p51
139 Bill 12 EN para 43
140 DWP, Reshaping workplace pensions for future generations: government response to the consultation, Cm
8883, 25 June 2014, p40
141 Bill 12 EN para 36
137
35
For example, Clause 5 (3) provides that a pensions promise would include a promise about
the factors used to calculate the level of retirement benefit but not a promise to pay benefits
by reference to what a pension pot or pool of assets can provide:
41. Any promise about a level of retirement benefit includes a promise about the
factors that will be used to calculate the level of a retirement benefit (subsection (3) (a).
These factors, may, for example, include the length of pensionable service, or be
linked to the member’s salary but do not include longevity factors. A promise that the
level of retirement benefit will be calculated by reference to what the pot of
contributions or investment returns can provide does not constitute a ‘pensions
promise’ for the purposes of defining a defined benefits or shared risk scheme
(subsection (3) (b). Neither is it a promise where a scheme specifies the factors that
will be used to distribute the assets between members and establish the value of a
collective benefit (subsection (3) (c)).142
Clause 5 (4) provides that a promise is provided if the scheme sets out the promise, or
requires it to be obtained from a third party. This “enables a pension scheme to be defined
on the basis of a pensions promise regardless of whether it comes from the scheme itself,
the employer or a third party.”143
Under clause 5 (5) there is a promise if the scheme offers it as an option. This means that:
[…] the scheme categorisation depends on what the scheme offers to members, not
the offer that individual members take up. Should a scheme offer a money purchase
pension with the option for members to purchase a guarantee, because there is the
potential promise to be given, this scheme would be defined as a shared risk
scheme.144
Clause 5 (7) provides that when working out whether there is a particular kind of promise in
relation to benefits, account can be taken of benefits that may be provided only after a period
of time:
[…] for example where members start in a scheme with money purchase benefits and
no promise but then after a certain number of years or a certain age start accruing
benefits to which a promise attaches.145
Treatment of a scheme as two or more separate schemes
Clause 6 provides for a scheme to be treated as two or more separate schemes. The
Explanatory Notes say:
47. This clause requires regulations to be made for a pension scheme that does not fit
within any of the categories set out in the clauses above (it is not a defined benefits,
defined contributions or shared risk scheme) to be treated as if it were two or more
separate schemes, each then fitting within a category, for the purposes of these
definitions and other specified legislation.
48. An example of such a scenario would be where an existing scheme has a defined
benefits section which is not open to new members, and a defined contributions
142
Ibid para 41
Ibid para 42
144 Ibid para 43
145 Ibid para 46
143
36
section for new members. This type of scheme would not be defined as a shared risk
scheme, since, though there are some elements of a pensions promise, the promise is
not available to all members. Instead, regulations must be made providing for the
scheme to be treated as if it were two schemes for the purpose of the categorisation –
in the example given above, it is likely that the power would be used to treat the
scheme as if it were a defined benefits scheme and a defined contributions scheme. 146
The Government expects this to ensure that “all schemes fit into the categories set out in
Part 1.”147
Interpretation of Part 1
Clause 7 defines some of the terms in Part 1, in particular, the terms retirement benefit,
retirement income and retirement lump, which are important in defining the pension promise.
For example, under clause 5 (1), there is a full pension promise in relation to a retirement
benefit if there is a promise about the level of benefit that will be received, which is
determined wholly by reference to that promise in all circumstances. Clause 7 provides that
‘level’ of retirement benefit means:
(a) in the case of retirement income, the rate of that income, and
(b) in the case of a retirement lump sum, the amount of that lump sum;
Furthermore, that:
“retirement income”, in relation to a member of a pension scheme, means pension or
annuity payable to the member on reaching normal pension age;
“retirement lump sum”, in relation to a member of a pension scheme, means a lump
sum payable to the member on reaching normal pension age or available for the
provision of other retirement benefits for the member on or after reaching normal
pension age.
Normal pension age in relation to retirement benefits refers to:
[…] the earliest age at which, or occasion on which, the pension scheme member is
entitled to receive benefits from the scheme without adjustment for taking benefits
early or late. If there is no such age or occasion, ‘normal pension age’ will be normal
minimum pension age as defined by section 279(1) of the Finance Act 2004 – that is,
before 6th April 2010, 50, and on or after that date, 55. A ‘fixed’ normal pension age
means a pension age (or other decumulation occasion) that cannot be changed except
by an amendment to the scheme rules.148
Amendments to do with Part 1
Clause 8 and Schedule 1 makes consequential amendments to existing pensions legislation
to take account of these new categories. It also replaces some references to money
purchase schemes with references to a scheme under which all the benefits that may be
provided are money purchase benefits.149 The Explanatory Notes set out where the effect of
the amended legislation is changed. In particular:
146
Ibid
DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911, para 18
148 Bill 12 EN para 51
149 Ibid para 54
147
37
1.3

Section 124 of the Pension Schemes Act 1993 places a duty on the Secretary of
State to pay unpaid contributions to schemes in the event of employer insolvency and
consequent default on employer contributions. The Schedule amends the wording to
replace ‘money purchase scheme’ with ‘defined contribution scheme, or a shared risk
scheme under which all of the benefits that may be provided are money purchase
benefits.’ In conjunction with an amendment included in Part 3 of Schedule 4, this
updates the provision to ensure that it applies in the right way to schemes that offer
collective benefits, as well as ensuring that “all schemes which are shared risk and
have only money purchase and collective benefits, and schemes which are defined
contributions and provide a guaranteed income after the point of retirement, are
captured.”150

Section 51 and 51A of the Pensions Act 1995 require pensions in payment to be
increased in line with inflation capped at 5% for rights accrued between 1997 and
2005 and at 2.5% for rights accrued from 6 April 2005. The requirements have not
applied to money purchase schemes since April 2005. These provisions are amended
to ensure that all defined contributions schemes, including money purchase schemes,
schemes offering collective benefits and those defined as self-annuitising, are exempt
from the indexation requirements.151

Sections 20 to 28 of the Pensions Act 2008 set out the requirements that a pension
scheme must meet if it is to be a ‘qualifying scheme’ for automatic enrolment
purposes. The provisions are amended to reflect the new definitions in Part 1. The
quality requirements are on the whole unchanged (except where stated).152
Part 2 – general changes to pensions legislation
Promise obtained from a third party
Clause 9 relates to the possibility of a promise being obtained from a third party as set out in
clause 5 of the Bill. The Explanatory Notes say:
[…] It contains a power to enable the Secretary of State to make regulations to require
that trustees or managers of a scheme must not obtain any such promise from a third
party unless conditions set out in the regulations are met. Regulations may also
provide for a prescribed person to enforce compliance with this requirement, and allow
civil penalties to apply to a person who fails to comply with them. This clause also
makes changes to section 34(7) of the Pensions Act 1995 to add this clause to the list
of provisions that section 34, which makes its own provisions in relation to trustees’
power of investment, cannot override.153
The intention is to enable additional member protections:
22. We intend regulations under this provision to enable additional member protections
where the scheme itself is not liable for the guarantee, and where there may not be a
direct contractual relationship between the member and the provider of the third party
guarantee in new styles of shared risk and defined benefits schemes, and where the
Pension Protection Fund and the Financial Services Compensation Fund may not
apply. The conditions would be intended to ensure that the risk being taken with such
an arrangement was proportionate.154
150
Ibid para 58
Ibid para 60
152 Ibid para 67
153 Ibid para 68
154 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP 2014-0911
151
38
Disclosure of information
The Pension Schemes Act 1993 (section 113) provides for the Secretary of State to make
regulations requiring pension schemes to keep certain persons informed of various matters
including the scheme’s constitution, its administration and finances and the rights and
obligations that may arise under the scheme. Following consultation, the requirements for
occupational and personal pension schemes were consolidated and are now in the
Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013
(SI 2013/2734).155
Clause 10 would amend section 113 of the 1993 Act to remove the ‘non-exhaustive’ list of
those people to keep informed. This list would in future be in secondary legislation. The
Government said this would “enable the Department to take account of the new categories of
scheme and members in terms that are meaningful.”
Clause 10 (4) would require schemes to have regard to guidance prepared by the Secretary
of State when complying with disclosure requirements. 156 The Government has consulted on
whether it would have guidance addressing areas of good practice. Some respondents said
this would helpful on specific areas such as lifestyling or electronic communications. 157
The Government has indicated an intention to bring forward a specific set of information
requirements relating to DA schemes:
37. The nature of DA schemes may mean there is a clear case for a common set of
information requirements distinct from those for DB and money purchase schemes.
The fact that DA provision will offer members some degree of guarantee but not
absolute certainty about their pensions means that the nature of the pension promise
may be harder to understand and more complex to communicate without being
misleading. As a result, we would consider the need to set out specific disclosure and
information requirements for DA schemes ensuring that members receive clear and
consistent explanations of their pension rights in the scheme.
38. We would look to ensure the approach to what we require is consistent with the
principles behind the new harmonised disclosure regulations which comes into force in
April next year. We expect that many of the elements of disclosure required for DB and
money purchase schemes may also be applicable and will ensure it is clear and easy
to identify what disclosure is required for DA.158
Regulations under section 113 are subject to the negative resolution procedure.159
Extension of preservation of benefit under occupational schemes
Before the Pensions Act 2014, legislation required occupational pension schemes to offer a
refund of contributions, or a cash transfer to a member leaving a scheme after three months
and before two years of service, who had not accrued any right to future benefits under the
scheme.160 The refund applied to the member contribution only, the employer contribution
remained in the scheme and could be used to cover future employer contributions, scheme
Details of the consultation are on the Gov.UK website – Occupational and Personal Pensions (Disclosure of
Information Regulations)
156 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911, para 25-6
157 DWP, The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013.
Government response to the consultation, July 2013
158 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, page 55, para 37
159 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP 2014-0911, para 28
160 Pensions Schemes Act 1993, section 101
155
39
administration costs or one-off scheme costs. There was no equivalent rule for workplace
personal pensions. In January 2011, DWP said it was concerned that this difference could
act as an incentive for employers to set up occupational pension schemes specifically to take
advantage of the short service refund rules. It was therefore examining the role short service
refund rules could play following the introduction of automatic enrolment.161 In December
2011, it said it had decided to abolish the use of short-service refunds for occupational DC
schemes.162 Section 36 of the 2014 Act therefore introduced a requirement that, where all
members are money purchase benefit, a preserved benefit must be provided after 30 days’
service. The right to a refund of contributions was removed.163
Clause 11 would extend this to apply to all cases where the pension benefit is not salaryrelated:
75. The clause states that schemes must provide a short service benefit where leavers
have at least 30 days’ qualifying service and all the pension benefit is a non-salary
related one (that is, not calculated either by rate or amount with reference to the
member’s salary). If any of the pension benefit is salary related, the two year rule still
applies.
76. Where a benefit may be calculated on a salary related basis in some
circumstances and a non-salary related basis in others (e.g. an underpin benefit which
pays the higher of the two calculations), it will be treated as salary-related for these
purposes.
77. If a member’s pensionable service began before the amendments came into force,
the previous requirements for preservation of benefits will continue to apply. 164
Early leavers: revaluation of accrued benefits
Clause 12 would make provision for the way in which the deferred benefits of early leavers
are revalued. Given the aim of encouraging personal pension schemes to provide benefits
other than money purchase benefits, the purpose is to ensure that revaluation methods
currently not available to personal pension schemes could be made suitable:
30. Following the changes made by this Bill, personal pension schemes will be
encouraged to provide benefits other than money purchase benefits. The power will
enable regulations to amend Chapter 2 in order to modify the current revaluation
provisions to ensure that the revaluation methods that are currently not available to
personal pension schemes are made suitable for those schemes. This will enable
those schemes to appropriately revalue deferred benefits for early leavers if new
personal pension schemes evolve so that the average salary or final salary method is
considered more appropriate. The power is restricted so that the revaluation method
used for a benefit to which a right has already accrued may not be changed (see new
section 85A(2)(b). This power will be subject to the negative resolution procedure.
Although it is a power to amend primary legislation, any regulations will be limited to
technical changes which build on existing requirements, and will be responsive to new
benefit structures. The negative procedure was therefore considered appropriate. 165
161
DWP, Preparing for automatic enrolment: Regulatory differences between occupational and workplace
personal pensions. A call for evidence. January 2011
162 DWP, Meeting future workplace pension challenges: improving transfers and dealing with small pension pots,
Cm 8184, December 2011
163 Pensions Act 2014 – Explanatory Notes, para 154-5
164 Bill 12 EN
165 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP 2014-0911
40
Early leavers: transfer values
Clause 13 and Schedule 3 would make amendments relating to transfer values to reflect the
new scheme categories defined in Part 1 of the Bill. The Explanatory Notes say:
87. Schedule 3 amends Chapter 4 of Part 4 of the Pension Schemes Act 1993, which
sets out provisions governing how members of an occupational or personal pension
scheme may apply for, take and use the cash equivalent value of their rights in the
scheme, and how that transfer value is to be calculated.
88. The existing provisions provide for two ways to calculate and give effect to transfer
rights. If the rights are to money purchase benefits, the transfer value is the realisable
value of the member’s rights in the scheme on any given date, which is relatively
straightforward to calculate. For salary related benefits the situation is more complex
as trustees have to convert a promised benefit into a cash equivalent. As there is no
direct correlation between the member’s benefits and the money available to pay them,
trustees are required to give the member a guaranteed cash equivalent that is valid for
a prescribed period of time.
89. This Schedule amends Chapter 4 to reflect the new scheme categories defined in
Part 1 of the Bill. Under the changes there will still be the same two methods to offer a
transfer value – members of defined benefits schemes, members of shared risk
schemes and members of defined contributions schemes that provide benefits other
than money purchase benefits will get a guaranteed cash equivalent, and members of
defined contributions schemes providing money purchase benefits will get the
realisable value of their assets.
90. As now, the details about how trustees and managers calculate a cash equivalent
will be described in regulations. 166
Indexation requirements
For DB schemes, there is a statutory minimum by which pensions in payment must be
increased. Under the Pensions Act 1995 indexation in line with prices, capped at 5%, was
required for rights accrued from 1997.167 Under the Pensions Act 2004, the cap was reduced
to 2.5% for rights accrued from 2005 onwards.168
Clause 15 would exempt Regulatory Own Funds (ROF) from the indexation requirements in
the Pensions Act 1995. The Government has said that the primary option for a CDC scheme
providing some form of promise or guarantee, would be a vehicle set up as a ROF. 169 The
reason for exempting ROFs from the indexation requirements is presumably that being able
to suspend indexation is one of the key levers available to CDCs needing to restore funding
levels (see section 3.4 below).
Clause 16 would introduce a regulation-making power to exclude other pensions of a
prescribed description from the indexation requirements for future accruals. Such regulations
would be subject to the affirmative resolution procedure, so need to be approved by both
Houses of Parliament before becoming law.170
166
Bill 12 EN
Section 51
168 Section 278
169 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, page 53
170 Bill 12 EN, para 96
167
41
Rules about modification of schemes
Section 67 of Pensions Act 1995 sets out the conditions under which the subsisting rights of
members of occupational pension schemes can be modified. As originally enacted, it
prohibited changes to the rules of a scheme which would reduce a member’s accrued
pension rights without the member’s consent. The 2002 Pickering Report on pension
simplification argued that this prevented DB schemes from making perfectly sensible
changes which would leave the members no worse off overall, and was a contributory factor
in many decisions to close down defined benefit schemes.171 Section 67 was substantially
amended by the Pensions Act 2004. Under the new rules, only detrimental changes to
subsisting rights were covered, and trustees may make changes without consent, so long as
each member from whom consent has not been obtained retains benefits that are actuarially
equivalent to those he had prior to the change.172 The Pensions Regulator explains the
applications of these provisions in Code of practice 10: Modification of subsisting rights
(January 2007).
In consultation on its proposals for DA, the Government said it did not think DB scheme
sponsors should have the power to modify subsisting rights beyond what was allowed under
existing legislation.
47. The Government believes that employers should not have the power to transfer or
modify accruals built up under previous arrangements into new arrangements, beyond
what is allowed under current legislation, otherwise there is a risk that members could
lose out on legitimate expectations.
48. This means that deferred and pensioner members, and the past accrued benefits
of active members, would not be affected as a consequence of introducing DA
pensions.
49. We do, however, want to support employers, scheme trustees and members who,
properly advised, wish to alter the shape of past accruals through options that already
exist, such as incentive transfer exercises and changes made with member consent.
Such options are legitimate ways for employers to manage their risks as long as they
are well run in line with best practice.
50. In order to protect members we believe the principles set out in the Incentive
Exercises for Pensions: A Code of Good Practice, published in June 2012, should
broadly apply in these circumstances. In addition, we are considering whether there
should be a requirement to provide independent financial advice in all cases where an
employer offers to transfer a member’s accrued rights from a traditional DB scheme to
a new arrangement.173
Reflecting the new definitions to be introduced by the Bill, clause 18 would provide for the
existing protection arrangements in section 67 to apply to a proposal to replace benefits to
which a promise is attached, with benefits where there is no promise. The Explanatory Notes
say:
99. Section 67 of the Pensions Act 1995 contains provisions to protect members
against detrimental modifications to their ‘subsisting rights’ – that is, ‘any right which at
that time has accrued to or in respect of [the member] to future benefits under the
171
Alan Pickering, A simpler way to better pensions, July 2002, para 4.26-4.33
Pensions Act 2004, section 262; Lewin and Sweeney, Deregulatory Review of Private Pensions, An
independent report to the Department for Work and Pensions, July 2007, p14
173 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p25
172
42
scheme rules; or any entitlement to the present payment of a pension or other benefit
which [the member] has at that time, under the scheme rules’.
100. Some changes can only be made if the member agrees: these are called
‘protected modifications’. Section 67A sets out the circumstances in which a
modification to members’ rights is a ‘protected modification’.
101. Currently, section 67A states that a change must be considered as a ‘protected
modification’ where money purchase benefits would replace non-money purchase
benefits, or where the change would result in a reduction to a pension in payment. This
clause amends section 67A to include a proposed modification where a right to
benefits that include a pensions promise is to be replaced by a right to benefits where
there is no pensions promise.174
Part 2 of Schedule 4 would provide for the protection arrangements also to apply to a
proposal to replace non-collective benefits with a right to collective benefits.175
1.4
Part 3 – collective benefits
Approach to legislation
In November 2013, the Government set out the approach it would take to legislating for
collective schemes. It said:
22. CDC schemes can take different forms. Some could potentially operate within the
existing legal framework in the UK; others, where there is no guarantee or promise are
more difficult to reconcile with it and may need a new regulatory vehicle. 176
Schemes offering some form of promise or guarantee, such as the pensions income builder
model, could operate within the proposed DA regulatory framework. The primary option for
this would be a vehicle set up as a Regulatory Own Fund (ROF).
CDC schemes that provide a promise or guarantee
23. CDC schemes that provide the member with some form of promise or guarantee,
such as the pension income builder explored in Chapter 4, could operate within the
proposed DA regulatory framework. As with any other scheme containing a promise,
they would need to be funded on a technical provisions basis and meet the appropriate
solvency requirements.
24. However, the means by which these funding requirements can be satisfied
are likely to be different from traditional DB arrangements where a sponsoring
employer stands behind the arrangement (and is effectively responsible for any
deficit that arises in the scheme).
25. The primary option for a CDC scheme providing some form of promise or
guarantee would be a vehicle set up as a Regulatory Own Fund. As a first step, we
would need to modernise the current Regulatory Own Funds legislative requirements,
not least to bring them into line with the other DA reforms and to ensure they work from
a practical perspective.
26. In European terms, such schemes fall within the terms of Article 17 of the
Institutions for Occupational Retirement Provision (IORP) Directive. This sets out the
174
Bill 12 EN
Ibid, para 127-8
176 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p53;
175
43
requirements for institutions that, themselves – rather than the sponsoring employer –
underwrite the liabilities or guarantees investment performance or benefits level.
27. Besides setting out the regulatory vehicle for these schemes we will need to
consider whether the framework should include other requirements to enable them to
provide the high levels of governance that would be needed to protect member
interests. For example, there may be a case for a more formal approval arrangement
on set-up, possibly by requiring schemes to obtain a licence from a regulator, as well
as being subject to regulatory oversight of their funding levels.
28. While we have identified Regulatory Own Funds as a potentially suitable
vehicle there may be other vehicles (which emerge either now or in the future)
which could also provide this type of collective arrangement. We are therefore
not looking to restrict the types of vehicles that could be used, simply to
provide an enabling framework.177
As regards scheme funding requirements, these would apply to the extent of any promise or
guarantee:
A Regulatory Own Fund vehicle offering deferred annuities and discretionary benefits
would need to be funded to the level required to meet the discounted capital value of
the liabilities (technical provisions) plus an appropriate buffer.178
A ROF is a scheme which itself, rather than any employer, underwrites liability to cover
against biometric risk (linked to death, disability or longevity), or guarantees a given
investment performance of a given level of benefits. Article 17 of the European Directive on
the Supervision of Institutions for Occupational Retirement Provision (2003/41/EC) requires
such schemes to hold additional assets above normal funding levels. The requirements of
Article 17 were transposed into UK law by the Occupational Pension Schemes (Regulatory
Own Funds) Regulations 2005 (SI 2005/3380). At that time the Government was not aware
of any such schemes operating in the UK.179
In June 2014, the Government said it was introducing a new definition of collective benefit,
which could fall within the DA or DC definition. Those collective schemes that did not provide
a promise or guarantee during the accrual phase would fall within the DC category:
Collectives are not currently possible in the UK in practice because they are not
catered for in either pensions or tax legislation. The Department for Work and
Pensions has had discussions with Her Majesty’s Treasury (HMT) and Her Majesty’s
Revenue and Customs (HMRC) to examine this issue. In order to enable collective
schemes that are run safely and regulated appropriately, we propose to define benefits
provided on a collective basis in primary legislation for the first time.180
Because such schemes were complex and could be opaque, they would need strong
standards of communication and governance:
We will create a framework that draws on the experiences of other countries where
collective schemes operate and places the interests of members firmly at the heart of
that design, prioritising clarity and transparency.
177
DWP, Reshaping workplace pensions for future generations, November 2013, Cm 8710, p53; See also, DWP,
Collective Defined Contribution Schemes, December 2009
178 DWP, Reshaping workplace pensions for future generations, November 2013, Cm 8710, p55
179 SI 2005/3380 – Explanatory Memorandum
180 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p22
44
Collective schemes are complex and can be opaque – because of the indirect
relationship between contributions and benefits. This necessitates strong standards of
communication and governance. We intend collective schemes to be overseen by
experienced fiduciaries acting on behalf of members, taking decisions at scheme level
and removing the need for individuals to make difficult choices over fund allocations
and retirement income products.
We will also introduce a robust regulatory regime in respect of targeting benefits and
internal accounting, providing regulators with the appropriate mandate and tools to
supervise schemes properly. We believe it is crucial that members fully understand the
risks associated with collective arrangements when they join the scheme, and while it
is not for the state to determine the benefit design of these schemes, we will ensure
that schemes set out clearly (to members) in advance how their rights are defined,
what they can expect from the pool, and how positive and negative shocks will impact
on their pension benefits.
Collective schemes, as with all DC arrangements, do not come without risk, but with
proper standards of governance and a suitable regulatory regime, we believe that we
can mitigate these appropriately. A definition of collective benefits and associated key
requirements will be included in the Pensions Bill while secondary legislation is likely to
include more detailed provisions in relation to areas such as benefit targeting, risk
management, communications and governance. 181
The necessary changes to tax rules would be addressed separately:
The legislative measures we will introduce will not address tax rules; however we will
continue to work with HMRC and HMT to consider how collective schemes would
operate within the pensions tax regime.182
Part 3 of the Bill defines the concept of collective benefits and makes provision for
regulation-making power in relation to them. These include powers to make regulations
requiring trustees/managers of such schemes to:
-
-
Set targets in relation to the rate or amount of benefits scheme members can expect,
which should be at a level which ensures that the probability of meeting them is equal
to or higher than a level of probability set out in regulations.
Request a certificate from an actuary confirming that the scheme has sufficient assets
to meet the initial targets, to a degree of probability specified in regulations;
Providing a statement of the scheme’s investment strategy, and keeping the strategy
under review;
Request regular valuation reports to assess the likelihood of the scheme being able to
meet the targets it has set relation to benefits; and
Have a policy for dealing with circumstances in which the probability of a scheme
being able to meet a target in relation to a collective benefit falls above or below a
level of probability set out in regulations.
This emphasis on setting targets, communicating with members and keeping the scheme’s
ability to meet them under review, would appear to reflect lessons learned from experience in
the Netherlands, summarised by DWP as follows:
181
182
Ibid
Ibid
45
19. Although historically schemes in the Netherlands have been described as CDC,
they were presented to the members as DB, with members developing expectations
that pensions were guaranteed, when in practice there was scope within the rules for
pensions (including those in payment) to be reduced in the event of under-funding.
Employers viewed them as defined contribution, so considered they had more control
over their costs than under DB.
20. Whilst the model seemed sustainable during a period of strong economic growth,
the downturn and the resulting pressure on scheme funding has led to benefits being
reduced and to the structure of the schemes being reviewed, with a new pensions
contract being introduced in 2015. As well as being explicit that there are no
guarantees, a new funding regime is being introduced. The changes are expected to
lead to a significant consolidation in the number of schemes.183
Detailed provisions in relation to areas such as benefit targeting, risk management,
communications and governance are to be in secondary legislation.184
In terms of governance, the Government said it intended collective schemes to be “overseen
by experienced fiduciaries”:
Collective schemes are complex and can be opaque – because of the indirect
relationship between contributions and benefits. This necessitates strong standards of
communication and governance. We intend collective schemes to be overseen by
experienced fiduciaries acting on behalf of members, taking decisions at scheme level
and removing the need for individuals to make difficult choices over fund allocations
and retirement income products.185
Throughout Part 3, there are references to “the trustees or managers of a pension scheme”,
suggesting that there is scope for them to be either trust-based or contract-based.
The RSA has argued that collective schemes (CDCs) should be trust-based:
Pension provision is notoriously open to conflicts of interest. And these are
exacerbated by the fact that individuals have little knowledge of what their pension
provider is doing and little leverage over their actions.
We would therefore strongly recommend that:
1. CDC pensions, like DB pensions should only be introduced under trustee
management; that is where the governance of the fund owes loyalty only to its
beneficiaries.
2. That the primary duty of the trustees is to represent the interest of the members.
The trustee body should have amongst its members adequate expertise to manage
the investment and benefit issues they will confront.
3. The trustees should make public their investment and benefit policy, and their
proposed response to known risks. These should be made available to all
beneficiaries.
183
DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, p47
DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p22
185 DWP, Government response to the consultation. Reshaping workplace pensions for future generations, Cm
8883, June 2014, p22
184
46
4. There should be clear rules as to the decisions which can be made by the trustees
and those which need the authorisation of the regulator.186
Definition
Clause 19 would provide for the definition of collective benefits. The Explanatory Notes say
that:
103. Where in all circumstances the rate or amount of the benefit payable to or in
respect of a member depends entirely on (a) the amount available to pay that
member’s and other members’ benefits and (b) factors used to determine what
proportion of that amount is available for the provision of the particular benefit. 187
Clause 19 (3) would provide that a benefit which is a money purchase benefit is not a
collective benefit.188
A scheme that provides collective benefits would fall within one of the definitions in Part 1 of
the Bill, depending on whether or not it provides a ‘pension promise’. A scheme like the
pensions income builder, where a proportion of the contributions paid are used to purchase a
deferred annuity each year, would fall within the shared risk definition.189 A scheme that offers
no pensions promise would fall within the DC category.190
Targets
Clause 20 would provide for regulations to require trustees or managers of schemes offering
collective benefits to set targets in relation to the rate or amount of those benefits:
In particular, regulations can be made about, amongst other things, the way that
targets are expressed, recorded and published. The intention is that members of a
scheme with collective benefits should be provided with a reasonable estimate of the
benefits that they can expect to receive from the scheme; in the absence of a welldefined pot over which the individual has clear ownership, the target is a way of
illustrating for the member what they might receive. 191
It also provides for regulation-making powers to require trustees/managers to obtain a
certificate confirming that “the actuary is of the opinion that the probability of the assets being
sufficient to meet the initial targets is in line with the level set out in the regulations.” 192 In
more detail, DWP explains that:
51. The setting of targets in relation to collective benefits is key to ensuring that
schemes providing collective benefits operate in as transparent a manner as possible.
Whilst the target is unenforceable, it will provide a clear indication of the level of
benefits that the scheme is seeking to provide for its members.
52. When a scheme first starts to offer collective benefits, the Department intends to
require the trustees or managers to obtain a certificate from an actuary which confirms
that the initial targets set by the scheme have been set at an appropriate level. This
level will be measured by reference to a level of probability specified by the Secretary
186
RSA, Collective pensions in the UK II, November 2013, p13
Bill 12-EN, para 103
188 Ibid
189 DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013 p34 and p51
190 Clause 5 (3) (c); Bill 12-EN, para 41
191 Ibid para 104
192 Ibid
187
47
of State in regulations (and this level of probability is also relevant to regulation-making
powers in subsequent clauses). In other words, at the point that the scheme begins to
offer collective benefits, there should be a tenable link between the contributions paid
into the scheme, the investments held by it and the target level of benefit to be
provided by those investments.
53. This level of probability will need to be set at a level which takes into account a
number of different matters. Concerns about scheme transparency and the important
of ensuring that members understand the rate or amount of benefit that the schemes is
aiming to provide will need to be balanced with the need to ensure that there is
sufficient flexibility about the link between assets and target levels to allow schemes to
take advantage of risk sharing options that are inherent to schemes that offer collective
benefits – for example, the ability to smooth investment across the membership. The
Department intends to canvas industry opinion as to the appropriate level of probability
before setting on a definite figure […]193
Investment strategy
Section 35 and 36 of the Pensions Act 1995 outline the requirements governing investments
for trust-based schemes. These include a requirement to produce a Statement of Investment
Principles (SIP): “a written statement of the investment principles governing decisions about
investment for the purpose of the scheme”.194 The required detail for the SIP is set out in the
Occupational Pension Scheme (Investment) Regulations 2005 (SI 2005 No 3378). Scheme
investments are covered in the Pensions Regulator’s Trustee guidance.
Clause 23 would provide a regulation-making power to require trustees or managers to
“produce a statement about the investment strategy to be followed in connection with the
provision of ‘collective’ benefits.” The Government has explained that although there are
potential similarities with existing legislation applying to trust-based schemes, it would be
important to have specific regulation-making powers in relation to the investment strategy for
collective benefits:
This is not only so that there is consistency in terms of investment requirements and
obligations between trust-based and contract-based schemes that offer collective
benefits, but also because, given the different nature of collective benefits to other
forms of pension benefits as a result of the opportunities associated with risk-sharing
between members, it is appropriate to have separate provisions relating to investment
strategy and decisions. For example, it may be appropriate for the investment strategy
for collective benefits to be revisited on a more regular basis than an investment
strategy which relates to the provision of other types of benefits – a requirement to
review the strategy on an annual, rather than a triennial, basis might be appropriate. 195
Clause 24 would provide a regulation-making power to impose requirements on trustees or
managers of schemes in relation to their choice of investments in connection with the
provision of collective benefits. This could include specifying criteria to be applied in choosing
investments and requiring diversification of investments.196
193
DWP, Pension Schemes Bill - Delegated Powers, June 2014, DEP2014-0911
Tolley’s Pension Law, E.40; IDS Pension Service, Pension trustees and administration, para 7.10;
Occupational Pension Schemes (Investment) Regulations 2005 (SI 2005/3378)
195 DWP, Pension Schemes Bill -Delegated Powers, June 2014, DEP2014-0911, para 66
196 Ibid, para 68 and 68; clause 41
194
48
Clause 25 would provide a regulation-making power to require the trustees or managers of a
pension scheme that provides collective benefits to obtain reports about investment
performance relating to collective benefits. DWP explains that:
This power is necessary to ensure that trustees or managers are actively reviewing the
performance of investments so that appropriate steps can be taken as quickly as
possible to address any issues with investment choices or strategy. This is important in
ensuring that there is transparency in the way that the scheme is run and also for
member protection.197
Valuation reports
Clause 26 would provide a regulation-making power to require those schemes offering
collective benefits to obtain, from an actuary, a ‘valuation report’ which values the assets
held by the scheme for the purposes of providing collective benefits and assesses how likely
it is that the scheme will be able to meet targets in relation to those benefits.198 It is
anticipated that such reports will need to be obtained on an annual basis, in order for the
trustees or managers to be able to monitor to what extent the assets held by the scheme are
likely to be sufficient to provide the target level of benefits.199
It also provides for regulations to require the actuary to certify whether the probability of the
scheme being able to provide the target level of benefits is equal to, higher or lower, than a
specified level of probability. This would be “key to the steps that the trustees or managers
take to respond to the outcome of the valuation” and links with the policy for dealing with a
deficit or surplus required under clause 28.200
Regulations may also require the report to be obtained from an actuary who has specified
qualifications or meets other specified requirements. The Government has explained that this
is to protect scheme members:
[…] Again, this comes down to member protection – the actuary will be required to
make judgement calls when valuing assets held by the scheme and assessing the
likelihood of the scheme meeting any targets in relations to those benefits which
potentially impact on the level of benefits the member actually receive from the
scene.[…] it is particularly important in the context of collective benefits that the actuary
has a sufficient and appropriate level of technical expertise, since the risk in relation to
collective benefits lies entirely with the members; the consequence of poor actuarial
advice could be lower benefits for members. Unlike under a traditional salary-related
pension arrangement where the employer stands behind any promise offered by the
scheme and is therefore responsible for meeting any funding shortfall, trustees or
managers may not have recourse to additional funds from an employer (or from the
member) in the context of providing collective benefits. The accuracy of the valuation
report and actuarial certification is likely to be of paramount importance. 201
Clause 27 would provide for a regulation-making power to make provision about the
methods or assumptions to be used by an actuary valuing assets, assessing the likelihood of
a scheme meeting a target in relation to collective benefits and in relation to the methods and
197
Ibid para 71
Bill 12-EN, para 112
199 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911, para 76
200 Ibid para 74
201 Ibid para 75
198
49
assumptions used in preparing a valuation report.202 The Government has explained that this
is in regulations rather than primary legislation for a number of reasons:
The provisions in this clause will involve a detailed and technical process that is most
suitably set out in secondary legislation. Its implementation will require further
consideration and consultation with interested parties, such as the actuarial profession.
It is also felt to be important to retain a significant degree of flexibility in establishing the
details of the process, so that the Department can make a quick and effective
response to any concerns raised. As schemes that provide collective benefits do not
currently exist within the occupational pension sphere in the UK, the Department will
need sufficient flexibility to ensure that the valuation process and the methods or
assumptions to be used by an actuary valuing target benefits, are fit for purpose.203
Regulations under clause 27 will be subject to the negative resolution procedure.204
Policy for dealing with a deficit or surplus
Clause 28 contains a regulation-making power to require trustees/managers of schemes
offering collective benefits to have a policy for dealing with circumstances where the
probability of meeting a target falls above or below a level of probability set out in regulations:
115. Under clause 28, regulations may provide that trustees or managers of schemes
offering collective benefits are required to have a policy for dealing with circumstances
where the probability of a scheme meeting a target in relation to a collective benefit
falls above or below a level of probability set out in regulations - termed in the Bill as
‘deficit’ or ‘surplus’ in relation to the target.
116. The clause also sets out powers to require the policy to contain provision for a
deficit or surplus to be dealt with in one or more of a range of ways, to contain an
explanation of the possible effect of the policy on members in different circumstances
and to be drawn up with a view to achieving certain results within a specified period of
time.205
DWP explains that the main objective behind this clause is to ensure that schemes offering
collective benefits operate in a “transparent and accountable manner” as the policy would set
out how benefit levels might change for members under different economic scenarios.206
Clause 28 (3) provides for regulations to require trustees/managers to consult about this
policy, make provision for the content of the policy and about how it is reviewed or revised.
The requirement to consult (clause 28 (3) (a)) is important because a change to the
surplus/deficit policy in a collective scheme could potentially involve a redistribution of assets
amongst the membership.207 The power to make provision about reviewing and revising the
policy may be used to require reviews on a regular basis - possibly on an annual basis to tie
in with valuation reports.208
While the intention is to allow trustees/managers flexibility as to how they deal with any
deficit or surplus, there may be some restrictions on this:
202
Bill 12-EN, para 114
DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911, para 80
204 Ibid para 81
205 Bill 12-EN
206 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911, para 84
207 Ibid, para 87
208 Ibid
203
50
[…] Whilst the intention is to use the powers to make provision about what information
the policy should contain (including the types of scenarios that the policy should
address), there should also be a degree of flexibility available to trustees and
managers as to the way that any deficit or surplus should be dealt with. The
appropriate action might, for example, differ depending on scheme design. This is why
subsection 4 (b) contains a power to require the policy to contain provision for a deficit
or surplus to be dealt with in one or more of a “range of ways.” However, it is important
that some safeguards are put in place in relation to acceptable ways or time periods for
dealing with a deficit or surplus; this is why a power has been included at subsection 4
(a) to require the policy to be formulated with a view to achieving results described in
the regulations within a period or periods described in the regulations. 209Clause 29
provides for a regulation-making power to allow an amount to be treated as a debt due
from an employer to a scheme offering collective benefits in situations where a deficit
in relation to a target benefit has resulted from a specified offence or the imposition of
a specified levy.210
Other provisions
Clause 30 contains a regulation-making power to require trustees/managers of schemes
offering collective benefits to have, and to follow a policy for the calculation and verification of
collective benefits.211 DWP explains:
96. This clause also contains powers to make other provision about the content of the
policy, the review and revision of the policy, and may require trustees or managers to
consult about the policy. This policy will be a key scheme document and it is important
that, as schemes providing collective benefits develop, there is an opportunity to adjust
the detail as to the content of the policy to take account of the way that a variety of
schemes operate in practice.212
Clause 31 provides for regulations to be made regarding the winding-up of collective
schemes. It:
[…] provides for regulations to modify the application of sections 73, 73A, 73B and 74
of the Pensions Act 1995, which concern the winding up of occupational pension
schemes, in relation to collective benefits.
121. The clause also provides for regulation-making powers to be used to make
provision in relation to collective benefits corresponding or similar to any provision
made by sections 73, 73A, 73B and 74 of the Pensions Act 1995.213
DWP explains:
99. The rules setting out the winding up of a pension scheme are important in providing
protection and transparency for members in the event of the scheme being wound-up.
Rules governing the winding up of existing occupational pension schemes (other than
money purchase schemes and other exempted schemes) are set out in the 1995
Pensions Act. However, the winding up provisions were not drafted with collective
benefits in mind, and it is likely that collective benefits will not be compatible with these
provisions as currently drafted. We envisage that collective benefits may therefore
need to be taken out of the existing wind-up rules and a more appropriate set of rules
put in place governing their wind-up. It is likely that the Regulations will need to include
209
Ibid, para 85
Bill 12-EN, para 117
211 Ibid, para 118
212 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911
213 Bill 12-EN
210
51
a greater degree of technical detail than would be suitable for inclusion in primary
legislation.214
Clauses 32 includes a regulation-making power to require trustees or managers to consult a
scheme actuary before taking action or decisions in relation to the provisions in Part 3 of the
Bill. This is important to ensure that scheme decision-making incorporates expert advice.215
In addition, regulations may provide the scheme actuary to have regard to guidance when
advising on these matters. The Government explains:
There is precedent within pensions legislation for including provisions which require the
actuary to have regard to prescribed guidance, for example under section 230(3)
(matters on which advice of actuary must be obtained) of the Pensions Act 2004. The
provision in clause 32(2) is a technical requirement to ensure that scheme actuaries
can be required to have recourse to the most recent and appropriate professional
guidance when advising those with responsibilities in schemes offering collective
benefits.216
Clause 34 provides a power to impose requirements in regulations about the publication of
scheme documents described in clauses 21-28 (regarding the processes for contributions,
investment and valuation in collective schemes). Regulations may also specify to whom such
documents should be sent.217
Clause 35 provides a power to make regulations regarding enforcement:
[…] conferring functions on a specified person to enforce regulations relevant to this
Part of the Bill, and a power for civil penalties to apply of the relevant requirements in
the regulations are not complied with.218
The Government has explained:
104. Clause 35 allows regulations made under Part 3 of the Bill to confer functions on
a specified person in connection with enforcement of those regulations. In addition,
clause 35 allows those regulations to provide for Section 10 of the Pensions Act 1995
to apply where there is non-compliance.
105. The Pensions Regulator has an existing enforcement power under section 10 of
the Pensions Act 1995. This prescribes that, where the Regulator is satisfied that by
reason of any act or omission this section applies to any person, they may by notice in
writing require that person to pay, within a prescribed period, a civil penalty in respect
of that act or omission not exceeding the maximum amount. The maximum amount of
any penalty under Section 10 of the Pensions Act 1995 is £5,000 in the case of an
individual or £50,000 in the case of a company, or such lower amount as might
otherwise be prescribed.219
Clause 37 and Schedule 4 would make amendments to other legislation to reflect the
introduction of collective benefits. These include the provisions in the Pensions Act 1995 to
protect members against detrimental modifications to their subsisting rights. The Explanatory
Notes say:
214
DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911
Ibid para 101
216 Ibid para 102
217 Ibid para 103
218 Bill 12-EN
219 DWP, Pension Schemes Bill Delegated Powers, June 2014, DEP2014-0911
215
52
127. As noted for clause 18 above, section 67 of the Pensions Act 1995 contains
provisions to protect members against detrimental modifications to their ‘subsisting
rights’.
128. Currently, section 67A states that a change must be considered as a ‘protected
modification’ where money purchase benefits would replace non-money purchase
benefits, or where the change would result in a reduction to a pension in payment. This
clause adds a further case to that list so that if a right to non-collective benefits would
be replaced by a right to collective benefits under the scheme rules, this is a protected
modification. Part 2 also modifies the 1995 Act to exclude collective benefits from the
existing framework of subsisting rights provision. 220
In addition, Schedule 4 would provide for:
-
Collective benefits to be exempt from the employer debt provisions in section 75 of
the Pensions Act 1995 which apply where a DB scheme in wind-up is in deficit.221
-
Occupational schemes offering only collective benefits (or only money purchase
benefits and collective benefits) will not be eligible for the Pension Protection Fund
(set up under the Pensions Act 2004 to provide compensation to members of defined
benefit pension schemes winding up underfunded on the insolvency of the
sponsoring employer).222
-
Schemes providing collective benefits are to be exempt from the scheme funding
requirements in the Pensions Act 2004 (which currently apply to occupational
pension schemes but not to money purchase schemes or schemes of a prescribed
description).223
-
Provisions requiring trustees or managers of occupational money purchase schemes
to prepare schedules of payments for scheme members are to be amended so that
it applies to all DC or shared risk schemes under which either all of the benefits to be
provided are money purchase benefits or money purchase benefits and collective
benefits.224
220
Bill 12-EN
Ibid para 131 and 132
222 For detail, see the website of the Pension Protection Fund. For more on the background to the scheme, see
Library Note SN 3917 Pension Protection Fund (July 2012)
223 For more detail, see Library Note SN 4877 Pension scheme funding requirements (March 2013)
224 Bill 12-EN, para 137
221
53