Minister Proposes ‘Defined Aspiration’ Pensions

Financial Times

February 7, 2012

  United Kingdom

Rules governing “gold plated” company pension schemes, including funding requirements, could be relaxed to encourage the take-up of new “defined aspiration” plans, under ideas being floated by the government.

As so-called final salary, or defined benefit (DB) schemes continue to close, the government is considering ways to encourage companies to offer a “third option” other than shifting staff into defined contribution (DC) schemes, where retirement income is not guaranteed.
 
Steve Webb, pensions minister, is proposing the idea of a “defined aspiration” pension, a hybrid scheme that would sit between DC and DB but would not be subject to regulations of DB, such as strict funding requirements.

“This type of pension could sit within a less burdensome regulatory regime and give businesses the freedom to offer the type of provision that works best for their employees,” Mr Webb said in a speech to the National Association of Pension Funds (NAPF) on Tuesday evening.

“A defined aspiration pension could allow employers to offer a measure of security to their staff, but would have a degree of flexibility that would recognise when external factors – be it increases in longevity, or significant changes in market conditions – make a firm promise impossible to keep.”

Webb has not provided further detail on how the rule book for DB could be lightened, but said the government would launch a consultation later this year on reinvigorating private pensions.

In their current form schemes offering defined benefits are subject to strict funding requirements, to meet their pension promises and fit with provisions on employer debt levels.

Defined benefit schemes are also required to contribute to the Pension Protection Fund, the fund of last resort for workers whose schemes have become insolvent. Currently an employer who wants to provide more than a defined contribution benefit is restricted to contributing more to their employee’s fund or making the full move to a DB pension, which for many employers isn’t financially feasible.

“At the moment we have an absurd situation, where if an employer attempts to offer more certainty, it is immediately classed as defined benefit and then subject to a myriad of regulations and restrictions,” Mr Webb said.

“Employers are increasingly giving up in the face of these obligations. They should not be forced to take on a burden that could put their business at risk over the longer term.”
Unlike defined contribution pensions, where individuals have no guarantee of what they will receive in retirement, Mr Webb said “defined aspiration” schemes “would give individuals a greater sense of what they would get in retirement”.

He said this could work by the “worker and employer targeting a level of growth, similar to cash balance plans, which are already in place in some of the country’s biggest workplaces”.

But other proposals to reduce the regulatory burden on employers have met with heavy criticism from unions.

Last month the pensions minister told the Financial Times that scrapping inflation protection for future final-salary schemes could reduce employers’ costs and ultimately help prevent the closure of generous DB plans in favour of DC arrangements. Across the UK, 2m active members of private-sector defined benefit schemes, are entitled to so-called “limited price increases” which boost pension income.

Unite, the biggest trade union in Britain and Ireland with 1.5m members, warned the government to “tread very carefully”, saying a “pension with no guaranteed increase is not really a proper defined benefit at all, as an absence of increases could easily halve its value”.

Risk sharing plans, such as “cash balance”, are preferred by the government to provide a halfway house between DB and DC provision.

Under these schemes the risk of generating retirement income is shared between the employer and the employee. Both make fixed contributions, but with the aim of achieving a defined cash value, rather than a level of income. At retirement, the risk of generating an income from the cash sum is offloaded to the employee.