Defined-aspiration plan shares risks, says Webb

Pensions minister Steve Webb will outline details of how the Government can encourage “defined-aspiration” provision in a consultation paper on reinvigorating occupational pensions later this year.

In a speech to the National Association of Pension Funds last week, LibDem MP Webb said policymakers want to encourage the creation of hybrid pension schemes which allow greater risk-sharing between employer and employee.

He said the schemes would not be subject to the same strict regulations as defined-benefit schemes and would offer employers more flexibility to react to market conditions.

Specifically, Webb said the DB rulebook, which forces companies to adhere to strict funding requirements and contribute to the Pension Protection Fund, could be relaxed for hybrid schemes.

He said: “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.

“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.”

Encouraging hybrid arrangements will form a central part of the Government’s commitment to reinvigorate occupational pension provision.

The Department for Work and Pensions will publish a consultation outlining how this can be achieved later this year.

Radcliffe & Newlands chartered financial planner Mel Kenny says: “This type of innovation has to be welcomed against the otherwise uncertain backdrop of retirement incomes being based on the random performance of stocks and shares as well as gilt yields.

“It will give employees greater faith in what they can get and encourage greater participation although the ultimate level of income will still be uncertain.”