Today I am publishing the Command Paper “Reshaping Workplace Pensions for Future Generations”. This sets out proposals to enable new forms of risk sharing in pension schemes. It builds on our strategy “Reinvigorating workplace pensions”, published in November 2012.
The current defined benefit and defined contribution pension arrangements place risk at polar extremes. In defined benefit schemes the risks are home by the employer who sponsors the scheme, whereas in defined contribution schemes the risks lie with the individual scheme member.
The shift away from traditional defined benefit is a long-term trend which, given the very different social and economic environment we are now in, is not going to change, unless we act now.
Automatic enrolment and the single-tier state pension will provide a firm foundation for saving for retirement. But if the current forms of defined contribution pension saving become the default alternative to traditional defined benefit pensions, scheme members will face uncertainty over the level of income they can expect in retirement.
Over the last year we have worked closely with employers and with representatives from across the pension industry to explore options for creating a new defined ambition pension category where risks (including inflation, investment and longevity) can be shared between a number of parties.
The consultation sets out our proposals for defined ambition pensions. These include:
Creating a new pensions regulatory framework that would allow for greater risk-sharing between parties, which could include employers, members, and insurers and investment managers.
Deregulating to allow a new flexible form of defined benefit pensions, that will enable employers to continue to offer pensions to members with a high level of certainty, but with much greater flexibility over the nature of benefits provided.
Enabling the development of new forms of defined contribution schemes that could provide more certainty for members without adding to employer liabilities.
Enabling new models of collective defined contribution schemes that could provide for risk sharing between members.
The Command Paper will also be available on the gov.uk website and the consultation closes on 19 December 2013. Subject to the outcome of the consultation, we aim to consult on draft legislation in the new year.