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IPE special report May 2018

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Law firm warns of major 'omissions' in UK's defined ambition proposals

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Positive reaction to last week’s publication of the UK government’s legislative agenda for ‘defined ambition’ pensions has dimmed somewhat due to concerns over what the Bill does not address, with law firm Slaughter and May highlighting the risk of re-characterisation and a lack of clarity over capped employer liability.

Last week, the government published the legal framework for the creation of defined ambition schemes – pension minister Steve Webb’s flagship policy for addressing defined contribution (DC) schemes’ limitations on risk-sharing.

Included in the Bill was the introduction of collective benefits, paving the way for UK schemes to offer collective DC-style pension arrangements, and pool risk among members.

However, Slaughter and May warned that the draft legislation raised a number of unanswered questions.

It pointed to the primary legislation’s lack of a “very clear statement” regarding an employer’s liability being limited to agreed contributions.

Philip Bennett, a partner at the firm, said: “There should be greater certainty in primary legislation that the employer is protected against the rules being changed.

“My expectation is that employers will welcome the opportunities, yet it does not specifically address one of the recurring themes in consultation – that employers want certainty.

“There is no protection against additional liability, and it is something that should be added.”

Additional funding requirements and “regulatory creep” are often cited as reasons for a significant shift towards pure-DC in the UK, prompting the government’s move towards target benefits and risk-sharing.

But without guarantees on liability, Bennett said, UK employers will remain wary of collective DC.

Further, he said the risk of re-characterisation remained in the legislation, with employers setting up collective DC arrangements at risk of becoming DB, and thus barraged with additional regulation.

“Employers should have two fares – what they agree to pay, and if the scheme is meant to be a specific type,” he said. “That decision should be conclusive.”

The law firm, which had previously drafted a document outlining the changes to UK legislation needed for the creation of defined ambition and collective DC schemes, said users should be aware of the two omissions.

The Bill saw its first reading in Parliament last week and will now face further scrutiny before it becomes law.

The government, while introducing the concept of collective schemes, said it would also look at alternative models such as ATP’s pensions income builder system, while allowing DC schemes that do not offer guarantees to annuitise internally, under current regulation.

Bennett said: “It is critical that an appropriate framework be put into place so this can be a workable option for employers in future.

“Otherwise, workplace pension arrangements may move to a ‘one size fits all’ world, where all employees are in individual defined contribution pension arrangements, even if those aren’t right for them.”

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