“Free us from design shackles,” say ACA and NAPF

By Stephanie Hawthorne

The exodus from defined benefit (DB) schemes continues apace. With this in mind, industry leaders say: “There is an urgent need to allow employers the maximum remit to offer risk sharing schemes”. This follows the Department for Work and Pensions’ consultation paper on risk sharing. This complex issue has brought forward a welter of responses.

Association of Consulting Actuaries (ACA) chairman, Keith Barton said: “Given the scale of closures of quality private sector schemes, government cannot possibly say ‘there is no need to change the law’ to encourage new risk sharing schemes.” He adds: “legislation will need to be announced in this year’s Queen’s Speech (3 December)”.

Nigel Peaple, National Association of Pension Funds’ (NAPF’s) director of policy, said: “Flexibility is essential. Our proposals, for alternative approaches on risk sharing, aim to stabilise, maintain and expand DB schemes and collective defined contribution (DC) schemes.”

With regard to promoting risk sharing, the NAPF has suggested three approaches for applying to existing DB schemes:

corridor indexation: schemes would continue to provide indexed benefits when in surplus but would not do so when the scheme is in deficit. “Missed years” of benefits could be made up in years of surplus
optional indexation: schemes would only provide indexation on an optional basis – with the decision being made by the employee and the costs involved being either funded by the employee or by a reduced pension
normal pension age: it should be made easier for existing schemes to raise the age of retirement (normal pension age) in line with rising longevity (but only for scheme members more than ten years from retirement and only by the number of years of increased life expectancy).

None of the three proposals would have any impact on the benefits of existing pensioners, says the NAPF.

The NAPF has also lent its support to greater risk sharing within DC schemes, notably the proposals set out in the paper for collective DC arrangements and the NAPF’s previous proposals for super trusts:

collective DC: the NAPF has welcomed the collective DC approach put forward by the government, though it will be important to ensure that the legislative requirements are not overly prescriptive
super trusts: super trusts would be multi-employer pension arrangements set up on a regional, sectoral or national basis and authorised by the pensions regulator.

John Davies, head of business law at ACCA, the accountancy body, says: “Conditional indexation would have a disproportionate impact on those already in retirement – these are the very group of people who are most vulnerable to inflation.”

Kevin Le Grand, head of technical services, Buck Consultants, commented: “We need to remove barriers, to help employers to design schemes that are relevant to them and their employees.”