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ACA calls for shared risk schemes as part of deregulatory review

The Government must introduce radical reforms in its deregulatory review of pensions including a “shared risk” scheme to avoid levelling down as a result of personal accounts, says the Association of Consulting Actuaries.

ACA chairman Ian Farr says occupational pension schemes can be re-energised by providing a new “third way” through shared risk schemes.

He says the schemes would be based on the member’s average pensionable earnings during the period of scheme membership rather than earnings at retirement.

The pension earned for each year of service would be revalued from that year to the date of retirement and increased when in payment, up to the 2.5 per cent indexation cap in current legislation.

Each year’s pension would be a defined benefit but future annual revaluations to that pension to the date of retirement and future annual increases when in payment would be targeted and supported by a funding reserve based on actuarial assumptions under the new scheme specific funding regime.

Scheme members would be protected by the Pension Protection Fund but levies would be lower to reflect the lower risk associated with such schemes.

Farr says: “New shared risk schemes are an important initiative in this direction and would sit comfortably between the existing defined benefit and defined contribution types of scheme.

“Shared risk schemes will enable employers to control costs into the future even if there are down swings in investment returns and continued improvements in mortality. For members, the advantages will flow from a more stable benefit platform than money purchase provides and – we think importantly – regular indexation of benefits supported by the new prudent funding regime”.

CBI deputy director general John Cridland says: “Looking to the future we also need more choice and innovation in occupational provision. Fresh ideas like shared risk schemes are to be welcomed at a time when so many companies are reviewing their pension arrangements in the light of the forward risks those schemes present to their ongoing business”.

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