UK - The Department for Work and Pensions (DWP) has issued a consultation on alternative ways to share risk in occupational pension schemes, including the potential for introducing conditional indexation.

The consultation paper admits schemes currently have limited options for reducing liabilities and sharing risk, which are divided between managing costs - through reducing accruals or moving to a career average scheme - or sharing risks with members by increasing retirement ages, or introducing hybrid or cash balance schemes.

However, since the government commissioned its deregulatory review of pensions in 2007, parts of the industry - particularly the Association of Consulting Actuaries (ACA) - has called on the government to allow defined benefit (DB) schemes to implement conditional indexation.

As a result, the DWP consultation paper is seeking feedback on three "alternative risk sharing approaches:

Conditional indexation for career average schemes - as proposed by the ACA this would allow schemes to halt indexation and salary increases if the scheme is in poor financial health, but this will become a priority once the scheme funding has recovered; Conditional indexation for all DB schemes, including final salary, which would work on the same basis as for career average schemes, but there would be no provisions for changing the normal retirement age and it would result in lower retirement income than final salary schemes but more certainty than defined contribution (DC) plans, and Collective DC schemes - a new hybrid development, copying those seen recently in the Netherlands, in which the employers pay a fixed contribution rate and the risks are shared between all the members rather than between members and the employer.

The DWP is asking stakeholders whether the government should amend pensions law to allow these new types of pension schemes, particularly as it highlighted specific "issues" with the proposals.

These include ‘moral hazard' on the part of the employer, administrative costs, increased complexity and fairness for conditional indexation schemes, and communication problems and a lack of "fit with the current regulatory regime" for the collective DC arrangements.

James Purnell, secretary of state for work and pensions, said: "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," he added.

In addition, Purnell also revealed the government will abolish the "survivor's benefit" rule for protected rights - the pension funds built up by contracting out of the state second pension (S2P) - which requires members to use protected rights monies to purchase a joint life annuity if they have a spouse or civil partner.

The government has admitted the decision to purchase a joint annuity should be based on personal circumstances, as this type of product "may not be in a couple's best interests".

Purnell said: "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," he added.