Response to: The Department for Work and Pensions Public Consultation. Reshaping Workplace Pensions for Future Generations

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1 Response to: The Department for Work and Pensions Public Consultation on Reshaping Workplace Pensions for Future Generations Introduction Scottish Life and Royal London Group are pleased to respond to this consultation on Reshaping Workplace Pensions for Future Generations. About Scottish Life Scottish Life was founded in Edinburgh in 1881 as a proprietary company before becoming a mutual in On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is the specialist pension arm of the Royal London Group, providing specialist pensions to pension scheme trustees, employers and individuals, and distributing solely through employee benefit consultants and financial advisers. About Royal London Royal London was founded in 1861, initially as a friendly society, and became a mutual life insurance company in It is now the UK s largest mutual life and pension company with funds under management of 73.5 billion. Our businesses serve around 5.5 million customers and employ 3,160 people. (All information as at 30 September 2013) Our response Our response is made up of 2 parts: 1. Our general view 2. Answers to the questions posed in the consultation 1

2 1. Our general view We welcome the Department for Work and Pensions (DWP) public consultation on Reshaping Workplace Pensions for Future Generations. We believe that the DWP s aim of trying to establish a middle ground between traditional DC and DB pension schemes through Defined Ambition (DA) pension schemes is laudable and well intentioned, but we are not convinced that there is real demand from employers for such schemes. Most employers do not want the liabilities associated with DB in any format, however those who already provide a DB scheme may be interested in the possibility of converting to a DA scheme when contracting out for DB schemes ceases. In our experience, most employers going down the DC route are focussed on the price, rather than the benefits that the scheme provides to members. They are therefore unlikely to be willing to pay more for guaranteed benefits. Flexible Defined Benefit Schemes The proposed simplification of DB schemes with the removal of the need to provide a survivor s pension and indexation of pensions in payment may be welcomed by employers, but whether it is likely to slow down the demise of existing DB schemes is unknown. It reduces future benefit costs for the employer, but this needs to be weighed up against the reduced future benefits being provided to the member and their spouse. Some employers may be interested in providing future benefits on this revised basis, but the majority of employers are likely to either continue with the existing benefit structure or, if cost is an issue, to close the scheme to new entrants and/or future benefit accrual. Our experience is that most employers nowadays are looking to remove risk from their business, rather than just reduce it, which is what the simplification would do by removing a significant risk in respect of future accruals. The automatic conversion of DB to DC when a member leaves employment is contrary to the underlying contract between the employer and employee within a DB scheme and conflicts with the aim of providing members with greater certainty of retirement income. Conversion from DB to DC already exists with transfer values, and the reluctance of members to voluntarily take transfer values implies that this option is not worthy of further consideration. It would also require a legislative override which could be contrary to Article 1 of Protocol 1 of the European Convention on Human Rights. Greater Certainty on DC Schemes We agree that having more certainty than traditional DC would be welcomed by members. However we are not convinced that it can be delivered in a meaningful way through the models proposed, as they are potentially difficult to explain to members, costly to offer and not adaptable to members changing circumstances. Very few employers and members are likely to be interested in a simple money back guarantee. And the cost of securing deferred annuities would be expensive, either in terms of buying out the benefits with an insurer or matching the assets with liabilities under the scheme. This leaves the capital and investment return model and retirement income insurance model, but they are complex to explain to members, do not adapt to members changing circumstances and come at an additional cost. 2

3 We believe that members can be provided with greater certainty of return through an extension of current investment strategies, in the form of With Profits. With Profits can provide members with a guaranteed benefit at their normal pension age to which bonuses may be added each year and possibly also a final terminal bonus. This investment option smoothes out a lot of the volatility experienced in unit linked fund investment under DC and addresses some of the issues noted above. Collective Defined Contribution Schemes Collective Defined Contribution (CDC) schemes are an interesting concept, but we are not convinced that they are suited to the UK pension landscape which is different to that of those countries in which these schemes currently operate. CDC schemes may have operated successfully for many years in these countries, but they have come under scrutiny in recent years following cuts to pensions in payment. We do not believe that such cuts would be acceptable to members of pension schemes in the UK. The main challenge for CDC schemes would be in obtaining the necessary scale, and quickly enough. Automatic enrolment could provide a steady ongoing in-flow of new members to the scheme, but it is unlikely to provide the necessary scale needed for the cost efficiencies and risk sharing quickly enough. It is likely Government intervention would be needed which could prevent, or at least hinder, the creation of market driven solutions in the future. We believe that With Profits investment under DC schemes could provide a viable alternative to CDC schemes. With Profits operates along similar lines to CDC schemes through the pooling of assets and smoothing of investment returns. Members then have at retirement the opportunity of buying a guaranteed benefit through an annuity, or choose to take income drawdown. In summary We believe that the focus of reshaping workplace pensions for future generations should be on improving the current DB and DC regimes, rather than creating a brand new regime which is what Defined Ambition most certainly would be. Significant developments have taken place with investment strategies in DC over recent years aimed at improving consumer outcomes and this is likely to continue. We believe that the development of future solutions is best left to innovation within the market. We believe that With Profits investment could play a key role, enhanced by suitable education and re-engagement of members around this investment medium. It can offer many of the benefits of CDC schemes but without the potential drawbacks. 3

4 2. Responses to the questions Chapter 2 The demand for defined ambition the consumer perspective 1. Do you agree that a greater focus on providing members with more certainty about savings or preferably income in retirement may increase confidence in saving in a pension? We agree that a greater focus can only help to restore trust in pensions and encourage greater member confidence and engagement in saving through a pension. 2. As an employer, do you have experience of, or can you envisage any issues with, employees being unable to retire due to DC pension income levels or certainty about income levels? We can foresee potential issues for an employer from having a disproportionately older workforce than they would have liked. 3. Do you have any further evidence or research planned which might help inform the development of DA pensions? We do not have any evidence or research planned which might help. Chapter 3 Flexible defined benefit making it easier for employers to sponsor schemes where benefits accrue on a specified basis Design 1: Ability to pay fluctuating benefits 4. What are your views on the feasibility of this scheme design? We believe that this scheme design is feasible as it was the way that DB schemes operated prior to We have seen DB schemes currently and in the past where employers have made discretionary payments from time to time to increase the accrued benefits or pensions in payment of members when the scheme funding position allows. 5. Are employers likely to be interested in providing benefits in addition to a simplified flat-rate DB pension on a discretionary basis or otherwise? We believe that employers providing a contracted out DB scheme may be interested in providing benefits on this basis. However the majority of such employers are likely to continue with the existing benefit structure for HR and staff retention reasons or, if cost is an issue and the retention of staff is not an issue, to close the scheme to new entrants and/or future benefit accrual. Our experience is that most employers nowadays are looking to remove risk from their business. The removal of indexation on pensions in payment reduces the future inflation risk, thereby easing the path to eventually buying out the member benefits when the scheme funding position allows them to do so. 4

5 6. What role do you see for scheme trustees in relation to discretionary payments? For example: Should they be involved in deciding whether a discretionary payment is made at all? Should they be involved in setting out how these payments are apportioned to members or should this be down to the employer? The trustees should be involved in deciding whether a discretionary payment should be made and in setting out how the payment is apportioned to members. The criteria for payment and basis of apportionment should be detailed in the scheme rules. The trustees have a duty to act in the best interests of all scheme members, whereas the employer may want to favour certain members. The trustees also need to ensure that the making of a discretionary payment is not going to jeopardise the future payment of non-discretionary benefits to members under the scheme. Their involvement brings independence and impartiality to the discretionary payment decision making process. 7. Do you agree that our starting point should be to keep regulatory requirements around discretionary benefits to a minimum? We agree that the starting point should be to keep regulatory requirements around discretionary benefits to a minimum. Trustees and employers are unlikely to want to have to operate radically different regulatory requirements for the non-discretionary and discretionary elements of a scheme, and this needs to be borne in mind for the regulatory requirements applying to the discretionary benefits. 8. How do you see funding for the non-discretionary DB element being sufficiently protected while allowing for extra discretionary benefits? For example, is there a risk that paying discretionary benefits could threaten the funding for nondiscretionary DB benefits for younger scheme members? Assuming that the discretionary element is a targeted, but not guaranteed, additional benefit, employers and trustees are unlikely to want the hassles involved with separate funding rates and funds built up for the non-discretionary and discretionary elements of the scheme. A simple solution would be that discretionary payments would only be permitted to be made under the scheme when the non-discretionary benefits were at least 95% covered at the last actuarial valuation. This would not preclude discretionary payments being made where the employer funded the cost of the discretionary benefit at the point of payment. Although there would still be a risk that paying the discretionary benefits could threaten the funding position of the non-discretionary DB benefits for younger scheme members, it is expected that the above safeguard would minimise or reduce the risk of this happening. Design 2: Automatic conversion to DC when member leaves employment 9. What are your views on the feasibility of this scheme design? 5

6 We do not believe that this scheme design is feasible or desirable. The automatic conversion of DB to DC when a member leaves employment is contrary to the underlying contract between the employer and employee within a DB scheme and conflicts with the aim of providing members with greater certainty of retirement income. Conversion from DB to DC already exists with transfer values and the reluctance of members to voluntarily take transfer values implies that this option is not worthy of further consideration. It would also require a legislative override to allow all of a member s accrued benefits to be crystallised and the cash value transferred to the employer s nominated DC fund without the need for member consent. This could be contrary to Article 1 of Protocol 1 of the European Convention on Human Rights. The Government has previously implemented detailed regulations to prevent the missselling of DB to DC benefit conversion without member consent. 10. If employers are able to use scheme designs 1 and 3, do you think it is still helpful for legislation to allow for this scheme design? No for the reasons mentioned in our response to Q Do you think this scheme design could be extended to permit employers to automatically transfer members out of the scheme at retirement? No for the reasons mentioned in our response to Q9. It would be inappropriate and unfair to unilaterally impose a revised benefit structure on a member who has very little or no time to adjust their retirement plans. Members who wish this type of change already have the option of taking a transfer value to a DC arrangement. 12. What would be the most suitable way for benefits to accrue under this model? And how might this best be communicated to ensure members understand the value of their pension benefits? There is no way in which this benefit structure could be understood by the average member unless the terms for conversion between DB and DC are guaranteed in writing in advance. 13. Assuming a CETV would not represent fair value for the accrued rights when the member leaves or retires, how might it best be calculated? Should the basis for calculation be different when the transfer is initiated by the employer (for example on redundancy)? A CETV must represent the trustees best estimate of the cost to the scheme of providing the accrued benefits. It is calculated on the basis of long term assumptions based upon financial conditions affecting the scheme. The cost to purchase the equivalent benefits from an insurance company is higher due to the prudential requirements imposed on insurance companies. 6

7 In the majority of cases, employers would be unwilling to provide a leaver with a greater amount than the expected cost to be incurred if the benefit stays within the scheme. This is shown by the fact most schemes do not have the assets to buy out their benefits. If the Government wishes to make this design work, it must either impose extra costs on employers or impose benefit reductions on members. 14. For schemes providing a lump sum benefit, what are your views on how the cash value should be calculated for members who leave before retirement? Should the net present value of the lump sum be calculated on how many years away from pension age they are? The method to place a cash value on the lump sum benefit is covered by the CETV legislation. This takes into account the member s age, sex, term to retirement and the conditions of payment specified by the scheme rules. 15. Could the accrual rate and pension value be along similar lines to existing cash balance arrangements? No. Although a cash balance arrangement might promise accrual of a sum of 10% of salary at retirement, the value of this to a 30 year old will be significantly different to the value of it for a 60 year old earning the same salary. Any value must allow for the timevalue of the benefit. 16. What forms of regulatory requirements would be needed to: prevent avoidance activity? ensure the scheme has access to sufficient funds to enable a transfer when a member leaves? For the reasons mentioned in our response to Q9, this scheme design should not be considered further. Design 3: Ability to change scheme pension age 17. What are your views on the feasibility of this scheme design? We believe that this scheme design is feasible. We are aware of some DB schemes where employers already share the cost of future improvements in longevity with members and a change to the member s normal pension age to reflect such changes would be a natural extension of this approach. 18. It could lead to more schemes having proportions of accrued pension payable at different pension ages. Would this further complexity outweigh the benefits? Schemes having proportions of accrued pension payable at different pension ages do add complexity but many existing DB schemes already have this complexity. For example, female members may have a retirement age of 60 for benefits accrued prior to the equalisation of retirement ages and 65 for benefits accrued after equalisation. Therefore it already exists and the complexity does not outweigh the benefits. 7

8 19. What role do you see the scheme trustees playing? Should they be involved in setting a new NPA, or should this be down to the employer and the employer s actuary? While responsibility for setting a new NPA should rest with the employer based on advice provided by an actuary, the trustees have a duty to look after the members accrued rights and hence should be involved with the employer in future NPA changes. For example, in ensuring that members close to retirement do not have their NPA adjusted unfairly. 20. What are your thoughts on how future pension ages are set? For GAD to publish a standard index based on longevity assumptions? Or do you prefer schemes linking their NPA with the State Pension age, so that when the latter changes, the scheme s pension age automatically changes in line with this? We would prefer that schemes link changes to their NPA with changes to the State Pension age. Members are more likely to understand the reason for changes to the NPA if it is linked to changes to the State Pension age which will be well covered in the media, rather than an index which they are unlikely to have heard of. Furthermore NPA has historically been the same as State Pension age for many schemes and many members will want to take their benefits no later than when they start to receive their State Pension. 21. How might the decision to change the NPA work in multi-employer schemes? Changes to the NPA should be able to be applied to an individual employer s section of a multi-employer scheme. Where the multiple employers are within the same corporate group, we would expect such a change to apply to the whole scheme. This would not be practical for industry wide master trusts. Amending an existing scheme or creating a new one? 22. As an alternative to opening a new scheme, do you agree it should be possible for an employer to modify the rules of an existing scheme so that it can be redesigned as a Flexible DB scheme in relation to new accruals, for example, it is possible to change the NPA and/or introduce automatic conversion to DC when a member leaves? We agree that it should be possible for an employer to modify the rules of an existing scheme so that it can become a Flexible DB scheme. Employers are unlikely to want to establish brand new Flexible DB schemes due to the costs and work involved in doing so (e.g. advisers, auditors, actuaries and investment managers). The ability to modify existing schemes is therefore essential for Flexible DB schemes to stand any chance of success. 23. Do you agree that employers should not have the power to transfer or modify accruals built up under previous arrangements into a new arrangement, beyond what is allowed under current legislation? 8

9 We agree that employers should not generally have the power to transfer or modify accruals built up under previous arrangements into a new arrangement beyond what is allowed under current legislation. Members have built up entitlement to these benefits and employers should not be allowed to change the format of the benefits without their consent. This would mean scheme design 2 would be a non-starter as it requires a legislative override to allow a member s benefit to be converted into a lump sum benefit without their consent. 24. Should there be a requirement to provide independent financial advice in all cases where an employer offers to transfer a member s accrued rights from a traditional DB scheme to a new arrangement? Legislation already stipulates the requirements for conversion of accrued rights into another form. If the member does not have a say regarding the transfer, legislation must stipulate sufficient safeguards around the transfer so there should not be any need to provide independent financial advice. There should only be a requirement to provide independent financial advice where the member has an option over whether or not to accept the employer s offer of the transfer of their accrued rights from the DB scheme to the new arrangement. The need for independent financial advice may need to be reviewed in light of the increasing move by many advisers to restricted financial advice. A possible alternative would be financial advice but not where an adviser is tied to a single provider. Chapter 4 Providing greater certainty for members in the defined contribution world 25. Do you think having more certainty than traditional DC would be welcomed by members, and help generate consumer confidence and persistency in saving? We believe that having more certainty than traditional DC would be welcomed by members. Research findings consistently indicate that members are concerned about the value of their pension. Providing members with greater certainty on the value should help to address these concerns, increase member confidence and hence improve their persistency in saving through a pension. 26. As an employer, if these products mean there is no funding liability, only the requirement to contribute as for a traditional DC scheme, would you be interested in offering these products to employees? We believe that some employers may be interested in offering these guarantee products to employees as a means of helping to address member concerns about the value of their pension. The challenges will be in communicating the guarantees to employees and the cost of the guarantees. The guarantee products are complex. If employees do not understand or fully appreciate the benefits that the products can deliver for them or the cost of the products is expensive in relation to the benefits they provide, employers will be put off offering such products to their employees. 9

10 We believe that certainty of return can more easily be delivered through an extension of current investment strategies, namely With Profits. With Profits can provide members in a cost effective manner with a guaranteed benefit at their normal pension age to which bonuses may be added. It is also a relatively straightforward concept to explain to employees whilst being flexible and hence may be more attractive to employers. 27. In relation to medium- and long-term guarantees outlined in model 2 (capital and investment return guarantee), and model 3 (retirement income insurance), would removal of the legislative barriers be sufficient to stimulate the development of market-based solutions? We are not convinced that the removal of the legislative barriers would be sufficient to stimulate the development of market driven solutions. We do not know the level of demand for such guarantees. We do not know what the guarantees cost to provide. The necessary investments to back the guarantees may not be available or available at the right price. Regulatory requirements including capital reserving may make the development of such products unattractive. Providing there is sufficient demand, the guarantee products are viable (i.e. cost effective to develop given the likely levels of demand) and there are no other barriers, the market would be likely to develop solutions. The problem at the moment is that there is not enough certainty in any of these areas for providers to develop market solutions with any degree of confidence As insufficient scale has been identified as a barrier to providing affordable guarantees, is there a role for the Government in facilitating different types of pension vehicles that would create greater scale for this purpose? The Government could facilitate these different types of guarantee products to create greater scale but it would need to be careful not to abuse its dominant position. The products developed would need to be fairly priced so as not to give the Government an unfair competitive advantage over solutions which the market may develop in the future. As mentioned in our response to Q26, we believe that With Profits investments could provide affordable guarantees in a scalable and cost effective manner. This would avoid the Government having to facilitate such guarantee products. 29. Are there any additional legislative barriers that stand in the way of innovation of products with guarantees? A charge cap on automatic enrolment schemes would be a legislative barrier to the innovation of products with guarantees as the presence of a cap would restrict the number of schemes that are able to access the guarantees. The extent of the issue would depend on the level of the charge cap and the cost of the guarantees which could be significant. This assumes a charge cap applies to such schemes and we believe that such a cap should apply to these schemes. 30. Do existing protection arrangements for DC products provide sufficient protection for members in the event of provider insolvency? 10

11 We believe that existing protection arrangements provide sufficient protection for members in the event of provider insolvency. This assumes that the guarantee products are suitably regulated and backed by an appropriate compensation scheme. 31. Would any protection mechanism need to apply in order to provide extra security for members and reassurance for the employer that it would not be liable in the event of any deficits arising? We do not believe that any protection mechanism needs to apply. The documentation should explain clearly to members and employers how the guarantees work and what could happen in different circumstances including insolvency. This should provide employers with the necessary reassurance that they are protected even if a deficit arises. 32. Are these models likely to be an attractive option for employers and members? We believe that these models may be an attractive option for some employers and members as a means of helping to address member concerns about the value of their pension. The attractiveness of the different models will depend on the cost of the guarantees and the perceived benefits that they bring to members. As mentioned in the consultation paper, model 1 (Money-back guarantee) is unlikely to be an attractive option to many employers and members due to the low number of circumstances in which it is likely to apply. Model 2 (Capital and investment return guarantee) and model 3 (Retirement income insurance) are likely to have more appeal to employers and members but they are more complex and difficult to explain to members. Model 4 (Pension income builder) is likely to be attractive for employers and members. It is relatively simple for employers to explain and provides members with an increasing guaranteed benefit which they will see grow year by year together with future conditional indexation. As mentioned in our response to Q26, we believe that With Profits could deliver certainty of return in a scalable and cost effective manner and hence be an attractive option to employer and members. 33. On model 4 pensions income builder what are your views on this model in which members are in effect deploying their own capital to guarantee their own entitlements? We believe that while this model is likely to be attractive to some employers and members as explained in our response to Q32, it will be challenging to deliver. The model needs scale to deliver in an effective manner. As the paper acknowledges, it is not clear how this scale is going to be achieved. A multi-employer scheme may provide sufficient scale but this would result in some employers cross subsidising other employers which may not be acceptable to all employers or their employees. It is not clear who would provide the working capital needed to set up and operate the non-deferred annuities where they are not written through a conventional insurer. Where 11

12 the annuities are written with an insurer, there will be capital reserving requirements that need to be considered by the insurer. Our experience is that conventional insurers are selective around what non-deferred annuity business they will write. They will only consider business that is of sufficient quality. This means that while larger schemes may be able to purchase such deferred annuities, a smaller scheme may not. We are not convinced trustees would want to constantly monitor the scheme s funding ratio and take appropriate corrective action where necessary to avoid any deficits arising. This would involve ensuring that assets and liabilities under the scheme are appropriately matched at all times. Many employers moved away from DB schemes to reduce trustee responsibilities and avoid the very risk of deficits arising. They would therefore be unlikely to go down this model route. So while the model may appear attractive to employers and members, there would be significant hurdles that would need to be overcome. The cost of covering the nondeferred annuities in particular may make this model less attractive than it first appears. Chapter 5: Collective defined contribution schemes 34. Do you agree that CDC schemes have the potential to provide more stable outcomes on average than traditional DC schemes? We agree that CDC schemes have the potential to provide more stable outcomes. This is achieved through the pooling of scheme assets which allows longer-term investment decisions to be taken and the smoothing of investment returns which takes out some of the volatility in the return for the member. With Profits operates along similar lines through the pooling of assets and smoothing of investment returns. We believe that With Profits investment under DC could be an alternative to CDC schemes. 35. Given there is no tradition of risk sharing between pension scheme members in the UK, are individuals going to be willing to share the benefits of protection from downturns in the market and increased certainty of outcome, with the potential disadvantages of intergenerational risk transfer? We believe that individuals would be willing to share these benefits with the potential disadvantage of intergenerational risk transfer. Research findings consistently indicate that members are concerned about the value of their pension. Providing members with protection from the downturns in the market and increased certainty of outcome are therefore likely to be welcomed and popular with members and increase their confidence in saving through a pension. Most members are not going to understand, or want to understand, the potential intergenerational risk transfer that could occur under such a scheme. They are more interested in the returns from the scheme rather than how they are achieved or the risks incurred in achieving them. 12

13 36. Is a CDC scheme designed to manage funding deficits by cutting benefits in payment going to be acceptable in the UK where traditionally maintaining the value of benefits in payment has been an overriding priority? We do not believe that cutting benefits in payments under a CDC scheme is likely to be acceptable in the UK. Benefits once in payment are generally considered guaranteed for the member and cannot normally be reduced. Furthermore cutting benefits in payment could cause serious financial hardship for some members of the scheme who need their full benefit amount to survive. Although some younger members in receipt of benefit could go back to work to top up their income, this may not be possible for some older members who are too frail to do so. 37. What levels of funding do you consider would be appropriate to ensure that a CDC scheme has sufficient capital to meet the liabilities and minimise the risk of benefits in payment being cut? A funding level of % of the value of liabilities may be appropriate to minimise the risk of benefits, including those in payment, being cut. 38. Given the need for scale and an ongoing in-flow of new members to ensure the sustainability of a CDC scheme, will it be possible to set up a scheme without some form of Government intervention? We do not believe that it would be possible to set up a CDC scheme without some form of Government intervention. Automatic enrolment could provide a steady ongoing in-flow of new members to the scheme but it is unlikely to provide the necessary scale needed quickly enough. Such schemes need scale for cost efficiencies and risk sharing, without which the costs of setting up and running the schemes become proportionately more expensive and the risk of not meeting the full benefit payments increases. While it may be technically possible to set up a scheme without Government intervention in the form of a master trust, the cost implications mean that it is unlikely to be practical to do so. 39. As a mutual model, it has been suggested that CDC schemes might prove attractive to the trades unions and other social partners might this be an option worth exploring? CDC schemes are only likely to be attractive to trade unions and other social partners if the charges are low and the risk of cutting a member s benefit is minimal. Many CDC schemes are set up to provide a target benefit and while an appropriate funding level may be set for the scheme, there is always a risk that benefits may need to be cut in the future due to higher administration costs, poorer investment performance or increased longevity than expected. This makes such schemes less attractive to these parties and hence we do not believe that it is an option worth exploring. 13

14 Chapter 6: Enabling innovation legislative approach 40. Do you agree that creating a unified and identifiable legislative framework that brings together the legislation relating to DA schemes would be preferable to simply amending existing legislation? We do not agree that creating a unified and identifiable legislative framework that brings together the legislation relating to DA schemes is desirable. It may bring together all the legislative requirements for such schemes in a single place, but it risks duplication with the existing legislation applying to DB and money purchase schemes and creates additional maintenance overheads. It also risks imposing a completely different legislative framework to a scheme on a change of scheme type, for example, a scheme changing from DB to DA or money purchase to DA. We believe that the existing legislative framework already allows for a lot of what DA is trying to achieve, especially through With Profits, and hence it would be better to update the existing legislation, piecemeal as this may be. This approach would avoid the issues highlighted above. 41. Do you have any comments on how to characterise the defining characteristics of DA pensions? The defining characteristics of DA pensions need to be kept simple. They could be as simple as providing members with some form of guarantee on their pension, but not complete certainty on the level of income that they will receive from it at retirement. 42. Do you agree that it makes sense to define DB schemes in their own right rather than simply by contrast to money purchase? We agree that it makes sense to define DB schemes in their own right, as it does to also separately define money purchase schemes. This would assist employers and trustees in categorising their scheme. 43. Do you agree that defining DA, DB and money purchase schemes should facilitate clear and proportionate regulation according to scheme type? We do not believe that a separate definition for DA aids clarity, other than perhaps defining DA as anything other than DB or money purchase. See also response to Q Do you have any comments in relation to the suggested definitions of DA, DB and money purchase schemes? The definitions for DB and money purchase schemes appear reasonable. It is not clear what the or when it would be paid adds to the definition of DA schemes. We would suggest that it is dropped from the definition of a DA scheme as it does not add anything and potential creates unnecessary confusion around when benefits may be paid under the scheme. 45. Are you aware of any schemes operating in the UK under the Regulatory Own Fund provisions? 14

15 We are not aware of any schemes operating in the UK under the Regulatory Own Fund provisions. 46. Aside from Regulatory Own Funds vehicles, are there any other vehicles which might be appropriate for the provision of collective CDC which offers some form of guarantee or promise? Master trust arrangements might be appropriate for the provision of collective CDC although it s not clear whether a master trust arrangement could achieve the necessary scale needed for such schemes quickly enough. 47. Do you think that setting up a CDC scheme should be subject to formal approval, for example licensing by a regulator? We believe that setting up a CDC schemes should be subject to the same formal approval process as setting up any occupational pension scheme. This would involve registering the scheme with HMRC and the Pensions Regulator. 48. Do you think that CDC schemes which do not provide a guarantee or promise should also be licensed? We believe that all CDC schemes should be licensed regardless of whether or not they provide a guarantee or promise. Pension schemes receive generous tax benefits and it is appropriate the provision of these benefits is controlled through a licensed system. 49. Do you agree that such CDC schemes should also be subject to DA requirements on governance and member communications? We agree that such CDC schemes should be subject to DA requirements on governance and member communications due to the pooled nature of assets under the scheme. 50. Should there also be an option for schemes that currently offer DC to convert to CDC? We do not believe that there should be an option for existing DC schemes to convert to CDC. Members will have built up benefit entitlements on an individual basis under the DC scheme and such entitlements should not be put at risk (e.g. benefits cut) through allowing the scheme to convert to CDC with the pooling of assets. If a DC scheme was allowed to convert to CDC, sufficient safeguards would have to be built into the CDC schemes to protect these members existing benefit entitlements. 51. In the absence of both a guaranteed pension entitlement and an individually defined pool of assets, how should assets in a CDC scheme be apportioned such that pension accruals can be measured for tax purposes against the Annual Allowance and the Lifetime Allowance? The contributions paid by, on behalf of, or for the member during the Pension Input Period for the CDC scheme should be assessed against the Annual Allowance. This is what currently happens under a DC scheme. 15

16 Any lump sum benefit plus the initial pension being provided to the member valued using a factor of 20 should be assessed against the Lifetime Allowance. It is not possible to predict any future cuts in pension amounts due to the scheme funding position. This is what currently happens under a DB scheme where the lump sum benefit is paid in addition to the pension. 52. What specific areas should we address in relation to governance and member communications for DA schemes? On governance for DA schemes, we believe the focus should be on: Creating a new set of knowledge and understanding requirements catering specifically for DA schemes. The current requirements cater for DB schemes and money purchase schemes. Creating controls and processes for the operation of DA schemes including the need for matching of assets and liabilities in respect of any guaranteed or promised benefits, the recovery plans that need to be put in place if there is a shortfall in funding at any time and the criteria for making discretionary payments. Creating a requirement for the scheme rules to detail the criteria for making discretionary payments and the method of apportionment of such payments taking account the best interests of all scheme members. On member communications for DA schemes, we believe the focus should be on: Disclosing the nature of the guarantee or promise to the member, the risks associated with it and what it means for them when a member joins the scheme. It is of paramount importance that a member knows exactly what they are joining, the upsides and the downsides. Disclosing the amount of guaranteed or promised benefit to the member on an ongoing basis. Members should be kept fully informed at least annually, possibly as part of the yearly statement, of what their likely benefit will be including any change in the benefit from that previously advised to them together with reasons for the change. 53. Do you have any comments on the assumptions in relation to scheme funding requirements? We agree with the assumptions in relation to scheme funding requirements. Our only additional comment relates to the size of the buffer under DA schemes. The buffer needs to be set at a high enough level to provide members with sufficient protection on their benefit amounts but not too high that it deters employers from offering DA schemes if such schemes are to stand any chance of success. 54. What specific areas should we address in relation to governance and member communications for DA schemes? This is a duplicated question. See our response to Q52 above. 16