The Department for Work and Pensions (DWP) has proposed a series of reforms for workplace pensions including a possible new structure for defined ambition (DA) schemes.
DA pensions would be a half-way point between defined benefit (DB) and defined contribution (DC).
DB has become too costly for most employers, some struggling under spiralling pension fund liabilities, while DC schemes have been criticised for putting too much investment risk on the individual member.
In a consultation paper, Reinvigorating workplace pensions, pensions minister Steve Webb (pictured) sets-out two vision for DA schemes: ‘slim lined’ DB, and DC with added guarantees.
To create a defined ambition pension by relaxing DB rules, the DWP proposed:
- A core guaranteed benefit with additional benefits, such as inflation indexation, conditional in investment performance
- Removing spousal benefits
- Converting the value of a member’s DB pension in to a DC cash sum when the member leaves, retires or dies
- A ‘fluctuating’ pension where most of the retirement benefit comes under a lighter funding regime
- Linking retirement age to state pension age increases
The DWP also sets out a different set of proposals, approaching DA from a DC starting point. All considered using a guarantee underpin offered by employers or insurers or possibly by a Pension Protection Fund-style protection fund and paid for by a levy on members’ funds.
The proposed guarantees include:
- A ‘money back’ guarantee to get back contributions
- A guarantee covering later years of retirement, based on a fund levy
- Guaranteed level of fund growth bought from insurers
- A retirement income guarantee bought near retirement using part of the pension pot