UK government publishes framework for DC guarantees, collective DC
The UK government has published the legal framework for its defined ambition agenda more than six months since the close of its industry consultation.
The publication includes parameters for the creation of “risk-sharing” pension schemes in an entirely new legal framework outside of defined contribution (DC) and defined benefit (DB).
In November 2013, the Department for Work & Pensions (DWP) began consulting with UK stakeholders on the creation of risk-sharing pension schemes under the banner of ‘defined ambition’.
This was followed by a commitment in the Queen’s Speech, which said the government would put forward legislation to allow the innovation of new pension scheme products in the UK market, focusing around the collective DC model.
Less than three weeks since, the government has put forward its plans for how these schemes can be created.
It said a new legislative framework would be crucial to the success of any defined ambition project and to encourage innovation into risk-sharing models.
The government will introduce a new legal definition of ‘collective benefit’, to be allowed under the defined ambition and DC frameworks.
These included collective DC models and leaves the potential for other retirement income protection mechanisms, including the use of deferred annuities similar to Denmark’s ATP.
In a potentially significant deviation from the current system, the government will expand the definition of DC schemes to allow for self-annuitisation and collective DC arrangements, as long as they do not offer guarantees while members accumulate savings.
DC schemes in their current form are prohibited from annuitising member savings, by automatically being reclassified as defined benefit and thus falling foul of additional regulation.
This means DC savers have been forced into the insurance company annuity market, often criticised for being uncompetitive and offering poor value.
The new framework for defined ambition schemes will have its own regulatory protections that the government hopes will support innovation in risk-sharing and collective models.
However, it warned that these schemes would still be strictly governed in the interest of members.
“We will also ensure proportionate regulation by applying requirements to certain features – where there is a promise, for example, ensuring it is funded – while still maintaining transparency in the law so employers are clear on the extent of their obligations,” the government said.
With regard to collective DC models, the DWP said the framework would draw on the experience of other countries where these models currently exist, with emphasis on clarity and transparency.
The schemes will be overseen by experienced fiduciaries, potentially removing the common UK usage of lay, and member-nominated, trustees.
“We will also introduce a robust regulatory regime in respect of targeting benefits and internal accounting, providing regulators with the appropriate mandate and tools to supervise schemes properly,” the government said.
Aside from collective DC models, the government also consulted on a variety of potential risk-sharing pension schemes.
The legislative framework will also set out space for further types of models, focusing on guarantees for retirement income that come into place as a member ages.
It will therefore not provide space for any money-back guarantees within DC schemes, but it will continue analysis and work out how other models fit in within the legal parameters.
These include capital guarantees, which protect the nominal value of member savings midway through the savings cycle; the use of retirement income insurance, which avoids single-event conversion risk; and the Danish ATP-style pension income builder, which uses continuously purchases deferred annuities.
However, the government said these models came with significant issues, namely scale, tax treatment and the ability of schemes to hedge risk.
The Bill will go before the UK Parliament today, before entering through the legal process before becoming law.
Steve Webb, the Liberal Democrat pensions minister, said: “These reforms meet the needs and concerns of business while, at the same time, standing up for the interests of workers who are doing the right thing and saving for their retirement.
“With the backing of consumers and industry, this Bill will bring about new and realistic pension scheme options for those employers who want to do right by their staff.”