Press Release

Pension Risk Sharing Consultation: ACA calls for design freedom for employers

28 August 2008

In a response to the Department for Work and Pensions’ consultation paper on risk sharing, the Association of Consulting Actuaries (ACA) has called for new forms of risk sharing and new scheme designs to be encouraged by legislation, provided these can be clearly and simply
explained to scheme members and meet appropriate minimum regulatory standards, including appropriate compensation for individuals in the event of employer or provider failure.

The ACA’s response points to the acceleration in closures of existing defined benefit schemes reported by a number of surveys over the last 3 months1 and the impact this is having on the pension expectations of private sector employees. This worsening trend means there is an urgent need to allow employers the maximum remit to offer risk sharing schemes when reviewing their existing pension arrangements, which many are doing or will be doing in the run
up to auto-enrolment and personal accounts in 2012.

The ACA says that if risk sharing is not encouraged by legislative changes, most private sector employers will have little option but to continue with the present trend, exposing more and more employees to the volatility of pension outcomes associated with defined contribution schemes. Commenting on the response, ACA Chairman, Keith Barton, said:

“Given the scale of closures of quality private sector schemes, Government cannot possibly say ‘there is no need to change the law’ to encourage new risk sharing schemes. That worst-case outcome, following on from the inadequate deregulatory reforms in this year’s Pension Bill, would be, quite frankly, a disaster for future generations of pensioners who would be denied the opportunity to plan for a secure and predictable retirement income.

“We are still pressing the case for a ‘first step’ risk sharing measure in the final stages of the Pensions Bill in October – the ACA conditional indexation model2 is the most well advanced of the new model designs in the consultation paper and is ready to run. It is a risk sharing option we have worked on for over two years and has a proven track record in The Netherlands.

“Otherwise, legislation will need to be announced in this year’s Queen’s Speech (3 December) to implement the outcome of this consultation next year. Any later timetable would simply be too late. This Bill would need to properly address the deregulation and encouragement of all forms of quality pension provision, before this is mostly lost from the private sector. If nothing significant is done, we doubt whether public sector pensions will be sustainable in their current form in the longer-term.”

“As the Director-General of the CBI recently said, employers need to have much greater freedom in pension design3. Risk sharing schemes, with appropriate light-touch regulation, offer a win-win opportunity for employers and employees. But, the dead hand of micro-management of pensions by Government has to go if there is to be any kind of interest in such schemes from employers.”