Department for Work and Pensions
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Easing the burden - Government to work with industry on risk sharing measures
New measures that could make it easier to share the risk taken on by employers who run occupational pension schemes will be considered by the Government and industry in the New Year announced Lord McKenzie today.
Following a consultation on risk sharing, Lord McKenzie said he would work with industry to take forward work on the following areas:
* what more could be done to share information on current risk sharing practices;
* flexibility in the way pensions accrue for future service to reflect increasing longevity;
* reviewing the burdens imposed by the arrangements for contracting out; and
* whether the requirement to index pensions in payment is appropriate for cash balance schemes.
The Government will also look further at how collective defined contribution schemes might work in practice but has decided not to pursue conditional indexation as the consultation did not provide sufficient evidence that it would have a significant impact on continuing defined benefits provision.
Lord McKenzie of Luton, Parliamentary Under Secretary, said:
"We want to strike that balance between easing the burden on employers who run occupational pension schemes and ensuring that the members of those schemes have the protection they would expect.
"The work we will take forward next year will give all of those involved the chance to explore how we can bring forward changes that make it easier to share pension risks.
"There was also significant support in principle, for the development of some form of collective defined contribution arrangement and we will carry out further work on the detail of how collective defined contribution schemes might work in the UK. However, we do not feel that the responses to the consultation provided a workable consensus on conditional indexation at this time."
Since the consultation, the Government has also announced various measures to ease the financial and administrative burdens on pension providers and help occupational pension schemes maintain good provision. These will continue as part of the response to the consultation. These measures include:
* A statutory override to enable scheme rules to be amended to reflect the lower statutory revaluation cap, and also the reduction in the indexation cap in the 2004 Pensions Act, which can be used where trustees agree to such a change.
* Reducing the revaluation cap for deferred pensions from 5% to 2.5% for future accruals.
* Self-certification for employers whose arrangements for workplace pensions meet the new quality standard that employees will receive the new minimum level of pension saving required under the Pensions Act 2008.
* The rates for the General Levy and the PPF Administration Levy for 2009/10 have been frozen at this year's level to avoid putting additional cost pressures on pension schemes.
* An informal consultation on the section 75 Employer Debt provisions.
The consultation closed on 28 August 2008 and over 80 responses were received.
Notes to Editors
1. The Government response to the risk sharing consultation is available at: http://www.dwp.gov.uk/pensionsreform/deregulatory_review.asp
2. Most employers with an occupational pension scheme offer either a defined benefit (DB) pension scheme or a defined contribution (DC) scheme. In DB schemes 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 the risk because the value of their final pension pot depends on investment returns.
3. In December 2006, DWP commissioned Chris Lewin and Ed Sweeney to undertake a deregulatory review to look at how the private pensions regulatory framework could be made simpler and less burdensome, thereby encouraging employers to continue to provide good pensions. As part of its response to their July 2007 report, the Government undertook to explore the scope for risk sharing in occupational pensions.
4. On 5 June 2008 the Government published a wide-ranging consultation document on risk sharing. This covered the decline in Defined Benefit pension provision - including causes of the decline and the latest trend information; an overview of risks in pension provision - setting out the key risks, who bears them and who might be best placed to bear the different risks; international experience of risk sharing; risk sharing within the current regulatory framework - including what changes employers are making to their schemes, what is possible and why only a few employers are taking advantage of these options; Conditional Indexation schemes and Collective Defined Contribution schemes.
5. Conditional indexation schemes are DB schemes in which inflation protection could be reduced or removed in years when the scheme was not sufficiently well-funded.
6. Collective defined contribution schemes are schemes in which the employer pays a fixed contribution into a collective fund instead of individual savings accounts. This means that risks are shared between members. Inflation protection or basic benefits could be reduced if the scheme was insufficiently funded.
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Website: http://www.dwp.gov.uk
