The Government has published the Pension Schemes Bill, which will permit the introduction of Collective Defined Contribution schemes.
Defining Ambition
The Bill starts by defining three types of scheme:
- defined benefit (“DB”)
- defined contribution (“DC”) and
- shared risk or defined ambition (“DA”).
A DB scheme is defined as one which provides a certain level of income for life, commencing at a normal pension age that is specified in the scheme’s Rules. A DC scheme is defined as one which provides no promise as to the level of benefit. All other schemes, for example cash balance schemes, are DA.
Some schemes provide different types of benefit to different groups of members. The Bill provides that a scheme with different categories be treated as more than one scheme, each DA, DB or DC.
Furthermore, the Government has, only recently, clarified the meaning of “money purchase” (in response to the Bridge judgment) but is now busy replacing all references to “money purchase” with “defined contribution”!
Benefits for Early Leavers
The Bill clarifies that, while refunds of contributions will no longer be allowed for DC schemes if a members leaves having completed 30 days’ service, they will continue to be allowed in cases where benefits are based, wholly or partially, on the member’s salary and he leaves with less than 2 years’ service.
If a member of a DA scheme wishes to take a transfer value to another arrangement, the Bill clarifies that the transfer value must be calculated as the cash equivalent of the member’s accrued benefits. Regulations will provide further details but presumably will recognize, for instance, the discretionary and uncertain nature of some benefits in a Collective DC scheme.
Following from the 2014 Budget, the Bill introduces a power for the Government to make regulations banning transfers from public service pension schemes (which are all unfunded) to DC schemes.
Collective Defined Contribution
The Bill introduces the concept of “collective benefits”. The detail will follow in regulations but the structure is expected to be that:
- the employer contributes at a defined rate and the contributions due are set out in a Payments Schedule (as in a DC scheme);
- those contributions are held in a common fund (as in a DB scheme), not earmarked to each member;
- the scheme targets (but does not guarantee) a certain level of benefits for members and there will be no compulsory indexation of the benefit in payment;
- in the event of there being a funding deficit, benefits may be cut back.
Collective schemes will not be eligible for the Pension Protection Fund, nor will they give rise to a “section 75” debt on a sponsoring employer. They will also not be subject to the scheme funding rules that apply to DB (and some DA) schemes, although there will be requirements for actuarial valuations to determine whether there are sufficient funds to provide the target benefits.
In a rather alarming suggestion of micro-management, the Bill contains a power for the DWP to make regulations prescribing when and how trustees of collective schemes should obtain investment performance reports, as well as what those reports should contain.
Other Changes
The Pensions Minister, Steve Webb, announced that the Government has decided not to proceed with the “DB-lite” options from its earlier consultation. However, the Bill contains a regulation-making power to make schemes exempt from having to provide indexation on pensions in payment. The exemption would apply only to pensions being accrued after the legislation comes into force and would not apply to DB schemes. Since it already does not apply to DC schemes the intention must be that the door is still open, or at least ajar, to allowing DA schemes with discretionary – or no – indexation.
In a nod to the “red-tape challenge” the requirement for the Pensions Regulator to maintain a register of independent trustees is to be repealed. We guess that there is unlikely to be a significant saving in TPR levies!