Defined ambition pension schemes

This note looks at the Coalition Government’s legislation for a new category of pension scheme – shared risk, or defined ambition – and its framework to enable schemes to provide collective benefits.

The background to this is that there are two main types of workplace pension scheme:

• Defined Benefit (DB) schemes that typically promise a pension linked to salary and length of service; and
• Defined Contribution (DC) schemes that pay out a sum based on the value of a member’s fund on retirement.

A key difference between these scheme types is who bears the risk. In DB schemes, longevity, inflation and investment risks are borne by the employer, whereas in DC schemes they are borne by the employee and there is a very high level of uncertainty about the level of income they can expect in retirement.

The Coalition Government consulted on the possibility of encouraging the development of ‘defined ambition’ (DA) pension schemes, the aim of which would be to create greater certainty for members than is provided by a pure DC pension, but at less cost volatility for employers than current DB pensions.

As part of this, it looked at how collective defined contribution (CDC) schemes might work in the UK. Its proposed model had a fixed contribution rate for employers, a target pension income for employees (with provision for this to be adjusted if the scheme is under-funded); and pooling of scheme assets (rather individual funds for each member), with an income paid from this pool at retirement. It found that this approach could provide greater stability of outcomes for individuals than traditional DC, with pension incomes less dependent on market conditions at the point of retirement. However, certain conditions appeared necessary to enable them to operate successfully – in particular, large scale and strong governance. (DWP, Reshaping workplace pensions for future generations, Cm 8710, November 2013, chapter 5).

It legislated in the Pension Schemes Act 2015 for a new category of ‘shared risk’ pension scheme and a framework for schemes to provide ‘collective benefits’. The debates on the Bill are discussed in:

• SN 7030 Pension Schemes Bill 2014/15 – House of Commons stages (Dec 2014)
• SN 7105 Pension Schemes Bill 2014/15 – House of Lords stages (Feb 2015)

However, after the 2015 election, the Conservative Government put these proposals on hold, to enable the Government, industry, employers and scheme members to concentrate on the implementation of other reforms already in the pipeline – the new State Pension, auto-enrolment and the pension freedoms (HLWS 238, 15 October 2015).

Following consultation, it decided to legislate for a new framework for CDC schemes in the Pension Schemes Bill [HL] 2019-20.