Changes to the DB regime
The Government recognises that “to facilitate DB pension provision for the longer term, regulatory constraints must be reduced as far as possible”. To this end, it proposes that compulsory indexation of pensions in payment will cease for pensions accrued in the future. The Government is considering whether to provide a statutory override to allow schemes to amend existing hard coded indexation provisions to achieve this.
One suggestion is that schemes could have a simplified core DB benefit and the employer could pay additional discretionary benefits where funding allowed. It is envisaged that legislative requirements will be changed in relation to preservation, revaluation, scheme funding, employer debt and the PPF levy so that they would not apply in relation to any benefit which is paid on a fluctuating discretionary basis. The constraints of HMRC’s rules on authorised payments will also need to be considered.
Options are also being considered under which, for future service, schemes could convert benefits of members who leave before retirement age into DC benefits and transfer them to a nominated fund. Work is ongoing to determine how this would work but it is currently envisaged that the employer would nominate a default fund, with a right for members leaving to choose an alternative.
It is proposed to give employers greater flexibility to change their scheme pension age, to reflect increased longevity. Schemes may be able to link retirement ages to state pension age or to an index to be published by the Government Actuary’s Department. Those within 10 years of retirement would be protected from such changes. Consideration is being given as to whether employers should have a statutory right to introduce such provisions.
Changes to the DC regime
The focus in a DC context is on providing greater security for members without a funding liability appearing on the employer’s balance sheet.
The consultation paper explores various options for guaranteeing a minimum level of DC benefits. The options include a money back guarantee, a guarantee of accumulations when the member reaches a particular age, retirement income insurance or a pension income builder (where some contributions purchase a deferred annuity each year). Consideration is being given to what legislative changes would be required to facilitate these options. Discussions are also being had with the insurance industry to determine whether they would be willing to provide such products.
It is perceived that there is an appetite for larger employers to participate in collective DC schemes, which could be structured to provide target pensions or pensions where indexation is conditional on investment returns. Consideration is also being given in relation to the operation of such schemes.
Changes to legislative landscape
There will be new statutory definitions of defined benefit and defined ambition schemes and legislation aimed specifically at defined ambition schemes. A DA scheme “would be a scheme under which members are given some form of guarantee in respect of their pension, but not complete certainty of the level of income that they will receive from it in retirement, or when it would be paid”. A DB scheme would be one in which the member is given complete certainty about the level of benefit that will be received in retirement. Thought is still being given as to how the DA legislative regime will work and how areas such as the PPF and scheme funding will apply in relation to it.
If all of the recommendations in this paper were implemented, it could bring seismic change to the UK pensions landscape and lead to pension provision looking quite different from the way it does now. However, the impact of any change in the DC environment will depend on the willingness of employers and the insurance industry to engage and it is not clear at the moment whether this willingness is there.
A full copy of the consultation paper is available here.
Consultation closes on 19 December 2013.