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Govt urged to explore new funding options on pension risk

Businesses are calling for the Government to review pension funding rules to make it easier for employers to offer pensions that provide more certainty than defined-contribution plans.

In February, pensions minister Steve Webb floated the idea of “defined-ambition” provision as a way to encourage firms to take on retirement risk.

In the Sunday Telegraph this week, Webb says defined-ambition schemes could encourage firms to offer “cash balance” arrangements, where the company guarantees to deliver a fixed pension pot at retirement.

Alternatively, Webb says employers could guarantee a certain level of benefit to younger workers within a target range. A third option would see employers given more flexibility over the date at which a pension is paid.

Confederation of British Industry head of labour market policy Jim Bligh says fear of being subject to onerous defined-benefit rules deters companies from offering guaranteed pensions.

He says: “Employers who have had DB schemes in the past are scarred by risk, so providing any kind of guarantee in the current environment is extremely difficult. On top of that, the system at the moment is designed for an employer to choose a DB scheme or a DC scheme.

“If you offer something in between, you could be subject to the full force of The Pensions Regulator’s funding regime. If policymakers are serious, they need to undertake a wholesale review of what qualifies as what type of scheme and how those schemes are regulated.”

National Association of Pension Funds policy director Darren Philp says: “We want to see the Government explore ’core DB’. A lot of the costs associated with defined-benefit pensions are around indexation and spousal benefits because the rules say employers have to provide both.

“If the Government removed those requirements, then more employers would be more willing to look at risk-sharing.”

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