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UK pension providers must innovate for 'defined ambition' to succeed

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  • UK pension providers must innovate for 'defined ambition' to succeed

UK - Pension providers in the UK must be able to offer new, innovative products outside the current system's regulatory constraints if 'defined ambition' and greater risk-sharing is to succeed, the National Association of Pension Funds (NAPF) has said.

Speaking with IPE, the organisation's head of policy Darren Philp was discussing the practical implications of pensions minister Steve Webb's proposals for a third-way pension system, currently referred to as defined ambition.

He said the current "two-bucket approach" to regulation - whereby a scheme was either defined benefit (DB) with all its guarantees, or defined contribution (DC) - should be revised to improve flexibility.

"What we need to do is open up the regulatory environment so providers and schemes can innovate and do things in this space," he said.

"It's not about one product or one type of solution, it's about a suite of solutions permissible within a regulatory regime."

He said that, ultimately, this could allow for the introduction of schemes where employers tailored scheme guarantees around the need of the workforce, with standalone guarantees for minimum investment returns, indexation or longevity potential options.

"There is a variety of different underpins you could include from an employer perspective as part of an annual pay round," he added, saying that an employer could, for example, evaluate the level of guaranteed investment return on a year-by-year basis, thus avoiding the risk of rising liabilities associated with DB funds.

"The regulation required for that sort of defined benefit would be very different from final salary," he said.

"We need to have that flexibility in the regulatory system to allow people to do things like that."

On the question of whether collective DC schemes had a place within the new defined ambition spectrum, Philp called for a debate on their inclusion.

This debate should include the problems such a risk-sharing scheme would be exposed to if the number of active members fell after a year or two of lower returns, leaving a smaller number of schemes to shoulder the investment risk, he said.

He added that, in such instances, the scheme risked losing "critical scale".

"You need to have that pipeline of people coming through," he said.

"I wouldn't say collective DC is totally out, but there are some difficult issues to resolve."

A parliamentary committee earlier this year announced it would examine the potential "scope" of collective schemes, although a previous Department for Work and Pensions consultation from 2008 on the issue did not come out in favour of their introduction.

For more on defined ambition and issues currently affecting the UK industry, see the September issue of IPE.

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