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
NEWS RELEASE