At the end of August, the Department for Work and Pensions (DWP) will be collecting responses and reactions to its risk-sharing consultation, but will this lead to a change in regulation later this autumn?
With the consultation in full swing, the pressure is now on the pensions industry and the DWP to work together to ensure new forms of risk-sharing are introduced to allow schemes greater flexibility over the benefits they provide. The main issue in question is indexation and how schemes apply it. The National Association of Pension Funds (NAPF) supports measures that introduce greater flexibility for employers wishing to provide risk-sharing schemes.
Over the last two years, it has argued for a number of changes, including a reduction of mandatory indexation requirements for future accrual; amendment of section 75 to make defined benefit (DB) provision less onerous for scheme sponsors; and an amendment to section 67 to make it easier to increase normal pension age for future accrual.
Debating the amendment
As the pensions bill passed through the committee stages in the House of Lords, the issue of conditional indexation was once again debated. The Conservatives tabled amendments to provide for conditionally-indexed schemes, which were developed by the Association of Consulting Actuaries (ACA). The ACA proposal allows for newly establish career average schemes to operate a system of indexation that is conditional on the funding position of the scheme. A similar system already works successfully in the Netherlands.
Speaking on the amendment, Baroness Noakes said: “The background to the amendments is the disastrous decline of private sector pension provision, and in particular private sector DB pension provision. We could, as we have done in the past, spend several hours debating the causes of this decline, but I am going to exercise considerable self-restraint and confine myself to the fact of it.”
Noakes went on to say: “Conditional indexation attacks one of the features of the rules for DB schemes that apply in the UK, but practically nowhere else in the world.
“It is an absolute requirement in the UK that both deferred pensions and pensions in payment have to be uprated in line with inflation. If we look to international experience, some, such as Ireland, compulsorily index deferred pensions, and some, such as Germany, compulsorily index pensions in payment, but only the UK does both. This is one of the drivers of the cost problem with DB schemes, and let there be no doubt that there is a cost problem for them in the UK — ask any finance director about that.”
Treading cautiously
In responding to the debate, Lord McKenzie, under-secretary of state for work and pensions, said: “We [DWP] expect to publish the response to the consultation in the autumn, and I will keep the House updated on progress in the meantime. Until we have gone through that detailed consultation, we believe it would be premature to rush into legislation, particularly given there are fairly broad powers and no great detail about what may be prescribed. Given there is not just one model of risk-sharing, we need to evaluate them all. However, it is an important issue.”
The debate around risk-sharing has been well documented over recent months. In a recent edition of Pensions Week, Raj Mody touched on risk-sharing arrangements and raised the question of complexity. In particular he asked whether we should be getting worked up about trying to explain the detailed workings of a pension scheme to the member, or should we focus on telling scheme members what the likely outcome will be. This is a more general debate around communicating pensions.
These extracts only provide a snapshot of the debates that have taken place in the Houses of Parliament, House of Lords and elsewhere.
However, one thing is clear: the debates indicate the need for the pensions industry to work closely together and highlight the key reasons and advantages for allowing risk-sharing beyond the current framework.
Much work has already been done; the government thinks it should be possible for employees and employers to decide jointly how to share the risks. But this is not possible under the current legislative framework, where certain elements are not open to negotiation between employer and employee. The NAPF and others continue to support the introduction of risk-sharing arrangements, and working together will convince the DWP and government of the need to take action.
Michelle Lewis is a senior policy adviser at NAPF
