UK - The UK government has not ruled out the possible introduction of conditional indexation but warned further consultation is needed on existing risk-sharing strategies and legal requirements.
Mike O'Brien, minister for pensions reform, said in an evidence session to the Pensions Bill Committee the government was "very interested" in proposals put forward by the Association of Consulting Actuaries (ACA), allowing defined benefit schemes to share some of the longevity investment risks with the members.
But O'Brien said it appeared ACA had been "a bit optimistic" in its claims suggesting these changes would only require a few amendments to the Bill, and instead argued the introduction of conditional indexation could be "quite a significant venture into rewriting some of the pension legislation".
In response to questioning from the Committee he added: "If we must do that, then it is best we that we do it properly, investigate these issues and see whether there are particular things we need to do. I do not think you are right in saying we are enthusiastic. We think this is a valuable idea which needs to be explored further."
Ian Farr, chairman of the ACA, admitted in an earlier hearing the proposal was not a "panacea" to the problem of declining DB schemes, but instead offered a "genuine middle way" between DB and defined contribution schemes which can be implemented quickly and has already been "well tried and tested" in the Netherlands.
In particular, the ACA is suggesting a system where members' benefits would increase depending on the financial health of the scheme. Whereas members would normally receive their benefits in full and they would be indexed each year, if there were investment problems there would be the opportunity to "hold off those increases" until the funding and investment conditions improved and the fund was again able to afford full indexation.
But O'Brien said: "The question is not whether we are interested in these ideas, but whether they are fully developed enough to form part of the Bill. There are already shared risk opportunities out there for various pensions schemes. Before we start to legislate, let us look at some of the issues in relation to them, identify the better schemes and identify some of the legal changes that need to be made.
"We would want to identify what needs to be done and see whether there is an opportunity for legislation some time in the future. I cannot give a definite view about when that would be. I cannot give a guarantee," he added.
At the same evidence session, Lord Turner of Ecchinswell, former chairman of the Pensions Commission, admitted the UK has a "fairly odd form of regulation at the moment" which it makes it difficult for employers to share the risks of a DB scheme but leaves them the option of closing existing DB schemes and passing the risk onto employees through a DC arrangement.
"There is something slightly illogical about that form of regulation. I think it is something that should be looked at. I do not think it will produce a revolution, but without the creation of hybrid risk-sharing schemes, the trend of DB provision in the private sector will be either a slow or a rapid decline," he warned.
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email firstname.lastname@example.org