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Risk sharing response shows Govt keen on collective defined contribution schemes

The Government has ruled out conditional indexation in its response to its consultation on pension risk sharing but says it will further investigate collective defined contribution schemes.

Collective defined contribution schemes allow employers to review the benefit they tell scheme members they can expect in retirement during tough economic conditions.

The Government says it has “decided to undertake future work on the detail of how collective defined contribution schemes might operate in the UK. The Government intends to explore with stakeholders a number of questions around the legislative provision that might be needed, the concerns raised over the communications challenges involved in such schemes and a range of detailed analytical and technical policy issues.”

The document also reveals the Government will launch a consultation, before spring 2009, on allowing employers to postpone scheme members’ retirement dates to reflect longevity. It will also review the burdens imposed by the arrangements for contracting out as well as employer debt.

It says: “The Government will work with practitioners and pension lawyers to develop proposals for regulations that will ensure schemes have more scope to introduce flexibility in the way pensions accrue for future service to reflect changing longevity with the aim of consulting by spring 2009 at the latest.”

The response rules out introducing conditional indexation, which allows defined benefit schemes to stop increasing benefits in line with inflation in turbulent markets.

The Government says: “Significant additional regulation would be required to provide an appropriate framework for such an approach and the complexity would inevitably hamper member understanding and potentially undermine member confidence. The Government’s view is that the consultation has not provided the weight of evidence that this proposal is likely to make the significant impact on the level of DB provision that would have justified overriding the concerns of member representatives. It has therefore decided not to pursue conditional indexation at this time.”

The Association of Chartered Actuaries and the National Association of Pension Funds were both for conditional indexation and have labelled the Government’s response a missed opportunity.

Chairman Keith Barton says: “The Government is long on words but short on deeds in supporting quality workplace pensions. Without a new ‘middle way’ option that better allows employers to cap defined benefit costs for the future, the vast majority of private sector employees will be moved into defined contribution schemes, with the volatility in outcomes associated with this design.”

National Association of Pension Funds chief executive Joanne Segars says: “It is hugely disappointing that the Government has not done more to promote risk sharing. A clear opportunity to ease the pressure on employers who support defined benefit pension schemes has been missed. In the current economic climate, a bold approach is needed to secure defined benefit pension provision in the same way a bold approach has been taken for other parts of the financial sector.”

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