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.
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