7 Shared risk and collective schemes
113. In the current workplace pension system, there
are only two types of pension scheme: Defined Benefit (DB) and
Defined Contribution (DC). In DB schemes, employers bear the entire
risk arising from increased longevity of scheme members and lower
investment returns; in DC schemes, employees bear the entire risk.
The Government decided to introduce a new type of scheme which
would allow risk to be shared more evenly between employers and
employees than the current models. This was initially known as
"Defined Ambition" but is now referred to as "shared
risk".[194] The
Pension Schemes Act 2015 which received Royal Assent on 3 March
2015, provides for the necessary legislative changes to introduce
shared risk pension schemes.[195]
114. The Act also makes provision for collective
schemes (previously referred to as Collective Defined Contribution)
as one form of risk-sharing model. Collective schemes do not share
risk between employer and employee in the same way as other risk-sharing
schemes; instead, pension pots are pooled and risk is shared between
scheme members. Members who have retired are effectively being
subsidised by active members (known as inter-generational risk-sharing).
Benefits in collective schemes are not as certain as benefits
in DB schemes (where members receive a proportion of their salary
for each year they contribute). Nor are they as uncertain as in
DC schemes, where the final benefit is dependent on market performance
during the savings period, the member's choice of retirement income
products, and the rates on offer for these.[196]
115. The CBI and EEF did not believe that there was
much appetite for shared risk or collective schemes as employers
were more likely to be looking to reduce their pension liabilities
and move away from DB schemes. However, witnesses agreed that
there would be interest and value in exploring the "pooling
and aggregating" of smaller schemes.[197]
Standard Life pointed out that employers with DB schemes might
have seen the new types of scheme as attractive 10 years ago but
many have since moved to DC. It believed that employers who had
already "achieved the benefits of a move away from underwriting
risk" are unlikely to be willing to adopt further significant
changes in the pension schemes they offer. This was likely to
mean that the number of employers willing to participate, and
the potential to achieve the necessary scale, would be reduced.[198]
Scottish Widows identified a similar lack of demand for these
new types of schemes.[199]
116. The Minister believed that the ending of contracting-out,
which is part of the reforms accompanying the introduction of
the new State Pension in April 2016, was "one of the obvious
triggers" for introducing the new types of pension scheme;
some employers were likely to move from DB schemes to shared risk
as a result. He accepted that collective schemes were a "niche
interest" but thought that there was "a lot of enthusiasm"
for them amongst those who were interested. Once the legal framework
was in place, employers would have a better idea about what these
new types of schemes could offer.[200]
117. We welcome the regulatory changes that enable
the use of shared risk and collective benefit schemes. We consider
that these do have the potential to provide more certainty and
confidence for savers about their retirement income. Sadly, however,
we found little interest in developing such schemes. In reality,
only small numbers of employees are likely to be affected by these
schemes, at least at first. In contrast, auto-enrolment and the
introduction of the new pension flexibilities have more immediate
implications for millions of people and significant challenges
remain in fully implementing both of these reforms. We therefore
recommend that DWP ensures that resources are not diverted towards
the development of shared risk schemes until AE is fully rolled
out, and effective operation of the new flexibilities is properly
established.
194 DWP, Reinvigorating workplace pensions, Cm 8478,
November 2012, Chapter 3 Back
195
HC Deb, 3 March 2015, col 811 and Pension Schemes Act 2015 Back
196
DWP, Reshaping workplace pensions for future generations, Cm 8710,
November 2013, Chapter 5 Back
197
Qq38-39 Back
198
Standard Life plc (AEP0012), para 42 Back
199
Scottish Widows (AEP0022), para 7.3 Back
200
Q344. The implications
of the ending of contracting-out were assessed in the Committee's
pre-legislative scrutiny of the proposals for the new (single-tier)
State Pension. See Fifth Report from the Work and Pensions Committee,
Session 2012-13, The Single-tier State Pension: Part 1 of the draft Pensions Bill,
HC 1000, April 2013, and the Government Response, Cm 8620, May
2013 Back
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