In this article we discuss the Government’s vision for a new type of pension arrangement called ‘defined ambition’.
Pensions currently fall into one of two camps: defined benefit (DB), for example final salary schemes, or defined contribution (DC) – known as money purchase schemes. With DB schemes, all of the risk lies with the sponsoring employer and with DC, all the risk lies with the member.
Under proposals announced in November 2014, Pensions minister Steve Webb set out his vision for a new type of pension arrangement, defined ambition (DA). DA fits neatly between DB and DC, providing employers with a pension offering that allows for a sharing of risk between the employer and the member. Its aim is to give members more certain outcomes while keeping employer costs under control.
Options put forward at the time included creating greater certainty for employees through improved DC schemes, and a flexible DB option that would enable sponsoring employers of DB schemes to offer less costly versions going forward (for example, removing the need for DB pensions to be increased in line with inflation and allowing employers to transfer accrued DB benefits into a DC scheme where employees leave the company).
However, following consultation undertaken on the back of these proposals, the Government recently announced that its plans for DA will now focus solely on improving the DC offering (rather than effectively downgrading the DB offering). There are two possibilities being developed:
- Guarantee-backed DC: for example providing a money-back guarantee (so that, at retirement, members will take away at least the value of the contributions they have invested) or a guarantee in relation to the investment or retirement income. Both of these options will create greater certainty for employees.
- Collective DC (CDC): in this type of arrangement, employers and employees pay in fixed contributions but the pension risk is shared between all members of the scheme. Retirement benefits are generally paid directly from the scheme in proportion to the contributions paid rather than requiring the member to purchase an annuity.
In general there has been positive support for the concept of DA amongst pensions professionals and employers (in his recent statement, Steve Webb said that 28% of employers had shown an interest in DA). However, concern has been expressed about the timing of the plans (hot on the heels of the auto-enrolment roll out) and about the regime that will establish and regulate DA (the challenge will be to introduce something less prescriptive and less complex than the DB regime). There are also questions over how these plans will fit with the announcements made in the recent budget (covered in our newsletter last month) allowing complete flexibility to DC pension savers at retirement.
It remains to be seen what the take up by employers will be but, as far as the Government is concerned, DA is one ambition it fully intends to realise.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.