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Purnell launches risk sharing consultation

DEPARTMENT FOR WORK AND PENSIONS News Release (PENS-071) issued by The Government News Network on 5 June 2008

A consultation paper looking at how employers can continue to maintain good occupational pension provision through greater risk sharing is published today.

The DWP is asking for views from stakeholders on whether the Government should amend pensions law to allow new types of pension schemes which would more evenly share risks between the employer and the individual.
These risks include investment performance and increasing life expectancy which can make pensions more expensive for employers to fund.

The department is also seeking views on whether greater risk sharing could be accommodated without major changes to the existing legislative framework.

Secretary of State for Work and Pensions James Purnell said:

"We know that providing defined benefit pensions can be expensive for employers and we want to explore how risk sharing can help them to continue to provide good schemes.

"We want to encourage innovation and growth in the market. But we also need to strike a balance between reducing costs for employers and protecting members' benefits.

"The aim of the consultation is to build a consensus around the motivations, interests and needs of employers - while assessing the risks and outcomes for pensioners of different approaches. We also want to learn from the experiences of other countries that have adopted risk sharing."

Mr Purnell also announced that the DWP intends to amend the current Pensions Bill to abolish the protected rights 'survivor's benefit' rule. This rule currently requires an individual with a spouse or civil partner, at the point of annuitisation, to use any contracted-out rights in their pension pot to purchase a joint life annuity. Depending on their personal circumstances, a joint life annuity may not be in a couple's best interests - for example if they both have built up good pension pots.

He said:

"Our aim is to make the pensions system as simple as possible and we've already announced that contracting out for defined contribution schemes is to be abolished. This is planned for 2012. Removing the survivor's benefit rule will mean that one set of rules will cover the whole of someone's pensions saving, and there will be less red-tape for pension providers.

"The key thing is that pension scheme members have the information they need to make informed decisions on annuity purchase - including whether to purchase a joint-life annuity to ensure their partner will be provided for. We'll continue to work with the Association of British Insurers, Financial Services Authority, the Pensions Advisory Service and other stakeholder groups to help people understand the consequences of their decisions."

Mr Purnell announced today's publication of the risk sharing consultation and the DWP's intention to remove the survivor's benefit rule in a speech to the Association of British Insurers last night (June 4).

Notes to Editors

1. At present, most employers with an occupational pension scheme offer either a defined benefit (DB) pension scheme or a defined contribution (DC) scheme. In a traditional DB scheme the employer bears the risk of the costs of paying a pension based upon the members' final or average salary for as long as that person lives. In DC schemes the individual bears all the risk because the value of their final pension pot depends on investment returns.

2. Risk sharing schemes are possible under the current legislative and regulatory framework - for example by adopting 'hybrid' pension schemes where some member benefits accrue on a DB basis and others on a DC basis.

3. The consultation also looks at some new approaches which would require significant changes to the legislative framework before they could be introduced:

* Conditional indexation schemes - in these defined benefit schemes inflation protection could be reduced or removed in years when the scheme was not sufficiently well-funded. The consultation document covers conditional indexation on both a career average and final salary basis.

* Collective defined contribution schemes - the employer pays a fixed contribution into a collective fund instead of individual savings accounts. This means that risks are shared between members. Based on the amount of money available from the employer contribution, a rate of pension is calculated as in a career average scheme, but without guaranteed benefits. Inflation protection or basic benefits could be reduced if the scheme was insufficiently funded.

4. The deadline for responses to the consultation is August 28, 2008. The consultation document is available at http://www.dwp.gov.uk/pensionsreform/pdfs/pensionrisksharing-consultation-june2008.pdf

5. It is intended that changes in the rules applying to survivors' benefits would take place in 2012 at the same time as the other changes to protected rights when contracting out on a defined contribution basis is abolished. The possibility of removing the survivor benefit rule was first raised in the DWP's May 2006 White Paper Security in retirement: towards a new pension system.

Website: http://www.dwp.gov.uk

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