Pension Schemes Bill Impact Assessment Summary of Impacts June 2014
Contents 1 Introduction... 3 Background... 4 Categories of Pension Scheme... 4 General Changes to Pensions Legislation... 4 Collective Benefits... 5 Other measures in the Pension Schemes Bill... 5 Summary of impacts... 5 Defined Ambition... 5 Other measures... 5 Annex A Impact Assessment Defined Ambition Pension Schemes 2
Introduction 1. The Pension Schemes Bill contains measures to: Introduce new definitions into the current legislative framework - establishing three, mutually exclusive scheme categories based on the type of promise to members during the accumulation phase of saving about the benefits that will be payable at retirement; Make consequential amendments to the existing legislation so it relates correctly to the new structures including revaluation of accrued benefits, and preservation rights for members leaving a scheme before normal pension age, as well as other amendments; Define collective benefits for the first time in UK pensions legislation, in order to enable the development of pension schemes which provide collective benefits, and take regulation-making powers in order to create a robust regulatory framework under which such schemes can safely operate; Fulfil a DWP commitment to the Red Tape Challenge, by removing a regulatory requirement deemed unnecessary; Incorporate some of the elements of reforms announced in the 2014 Budget; and Strengthen existing legislation relating to pensions. 2. Further detail on particular provisions can be found below and in the explanatory notes for the Pension Schemes Bill. 3. The Government recognises a responsibility to consider the impact, in terms of costs and benefits, of new regulatory proposals. It also has a statutory duty to consider whether new regulatory proposals have impacts on individuals that differ by the protected characteristics of race, disability and gender. 4. This note summarises the Impact Assessment for the provisions contained in the Bill which have significant costs to the Exchequer and/or impact on business or civil society organisations. An Impact Assessment for general pensions reform to enable shared risk schemes (Defined Ambition schemes) is at Annex A. Other measures in the Bill are not considered to cause significant cost to the Exchequer or have an impact on business or civil society organisations. For these measures, no Impact Assessment has been conducted. 3
Background 5. In November 2013, the Government published a consultation paper, Reshaping workplace pensions for future generations, which outlined broad proposals for encouraging greater risk sharing in private pension arrangements in the UK. The paper set out the possibility of legislating to allow for new types of pension arrangements based on the extent of risk that is borne by scheme members. 6. Responses that were received during the consultation period were then considered in the Government response paper published in June 2014, which set out proposals for going forward. Those proposals form the basis for the reforms to pension scheme definitions set out in Part 1 of the Bill, and the enabling of collective benefits as set out in Part 3. Consequential, and other, changes to existing pensions legislation are addressed in Part 2. Categories of Pension Scheme 7. This Part of the Bill contains provisions to change the legislative framework relating to categories of private pension scheme, establishing three mutually exclusive definitions for scheme type based on the type of promise during the accumulation phase about the benefits that will be payable to members at retirement. It seeks to clarify existing legislation to address the polarity between schemes which are commonly termed Defined Contribution and those which are commonly termed Defined Benefit. In the former, the scheme member has no certainty and bears all the risks of investment performance, inflation and longevity; in the latter, the situation is reversed so that employers bear all the risks on the behalf of scheme members. This legislation thus makes a clearer middle ground with potential for innovation in scheme design to encourage greater risk-sharing between parties. General Changes to Pensions Legislation 8. This Part, in the main, addresses the implications to existing legislation of the changes in scheme category under Part 1 (above). It makes consequential amendments to provisions dealing with the revaluation of accrued benefits within a pension scheme, and preservation of benefits when a member exits a scheme before retirement. It inserts a new regulationmaking power which may provide that trustees and managers can only obtain third party promises which meet certain requirements, as well as a power to exempt prescribed schemes from current indexation requirements. It also makes changes to subsisting rights legislation to ensure that existing member protection against detrimental amendments to rights in a scheme apply correctly under the new categories. 9. This Part of the Bill also removes the statutory requirement for regulations to provide that the Pensions Regulator compile and maintain a register of trustees thus fulfilling a DWP commitment to the Red Tape Challenge. 10. The 2014 Budget announcement on Freedom of choice in pensions gives savers greater choice about how and when they access their defined contributions pension pot. The new flexibilities will also have implications for those with a defined benefits pension pot, and HM Treasury are currently consulting on how these flexibilities, including individuals rights to a transfer, should be managed. As the majority of public sector defined benefit schemes operate on an unfunded basis, allowing transfers out of these schemes would expose the 4
Exchequer to significant risks. Therefore the Bill introduces a power to restrict transfers out of public service defined benefits pension schemes. Collective Benefits 11. This Part defines the concept of collective benefits. A scheme s benefits may be thought of as collective in nature if risks are pooled across the membership with the value of pension benefits being determined in accordance with the investment returns on the collective fund, any redistribution between the membership and any other relevant actuarial factors. When a member retires, they do not have to select an individual retirement income product; rather, an income can be paid from the asset pool. There are examples of collective schemes in the Netherlands and Denmark (i.e. schemes which are set up on the basis of providing collective benefits to members), where evidence suggests they can, when governed appropriately, encourage a greater degree of stability in pension outcomes than individual Defined Contribution schemes. 12. This Part also makes provision to specifically exclude collective benefits from the indexation requirements of the 1995 Pensions Act, as well as certain provisions related to the funding of pension benefits. It also contains a number of measures relating to the tracking of contributions in collective schemes, the setting of targets in relation to benefits, and valuation and reporting requirements for collective benefits, all of which are designed to provide transparency and to protect members. Other measures in the Pension Schemes Bill 13. Part 4 contains a small technical provision allowing the Secretary of State to make payments into the Remploy occupational pension scheme directly, rather than through the payments he makes to Remploy the wider organisation. Summary of impacts Defined Ambition 14. Changes in the legislation concerning private pensions may incur some small upfront costs for existing pension schemes, due to the need to assess what category of pension scheme they will become under the new definitions. However, the overall effect of this legislation will be to enable innovation with relevant consumer protections as such, it is expected that there will be zero net regulatory costs in the long term. 15. A full copy of the Impact Assessment conducted for changes to pension legislation to encourage shared risk (Defined Ambition) schemes is included at Annex A. Other measures 16. The Remploy measure is a technical provision allowing the Secretary of State to make payments into the Remploy occupational pension scheme directly, rather than as is currently the case Remploy funding the scheme through monies received from DWP. The proposed legislation will allow for a change to the funding mechanism if required in the 5
future but will have no impact on the amount. As such, it does not require an Impact Assessment. 17. Similarly, the measure removing the requirement that the Pensions Regulator compile and maintain a register of trustees is not considered to require an Impact Assessment. This measure removes the regulatory burden on the Regulator to maintain a register of trustees in order to appoint an independent trustee to a scheme whose employer has suffered an insolvency event. As the Regulator has another, general power to appoint trustees to replace a person found to be not fit and proper to be a trustee, it is considered that this option is less burdensome and thus less costly for both the Regulator and independent trustees than the current requirement. 18. As noted above, full discussion of the measures in the Pension Schemes Bill is given in the accompanying explanatory notes. 6
7 Annex A: Impact Assessment - Defined Ambition Pension Schemes
Title: Introduction of legislative framework for Defined Ambition pension schemes IA No: DWP0043 Lead department or agency: Department of Work and Pensions Other departments or agencies: Summary: Intervention and Options Impact Assessment (IA) Date: 11.04.2014 Stage: Final Proposal (Pensions Bill 2014) Source of intervention: Domestic Type of measure: Primary legislation Contact for enquiries: Shyamala Balendra (0207 449 7623) RPC Opinion: Green Cost of Preferred (or more likely) Option Total Net Business Net cost to business In scope of Measure qualifies Present Value Net Present per year (EANCB on 2009 One-In, Two- as Value prices) Zero Zero Zero Out? Yes Zero net cost What is the problem under consideration? Why is government intervention necessary? The provision of pensions involves financial, economic and longevity risks, all of which come with significant costs. The two models dominating existing provision, Defined Benefit (DB) and Defined Contribution (DC) place all of these risks and associated costs with the sponsoring employer and individual member respectively. Pension scheme designs which allow for these risks to be shared, resulting in less risk placed on any one party, are limited by current pensions legislation. Following extensive consultation and collaboration with industry, Government is intervening to create a legislative framework that enables new types of risk-sharing in pension schemes, as well as allowing schemes to offer collective pensions. What are the policy objectives and the intended effects? The objective is to encourage the pensions market to develop new types of pension provision in the form of Defined Ambition (DA) schemes through explicit recognition of such schemes in legislation and through clarifying the legislative framework for different types of pension schemes (DB, DC and DA). By creating this legislative framework Government intends to encourage a new class of risk-sharing (DA schemes) in order to provide more certainty in terms of retirement outcomes for members than DC schemes and to create greater choice regarding pension scheme design. The legislation will also allow schemes to offer collective pensions, which pool risks among the membership. What policy options have been considered, including any alternatives to regulation? Please justify preferred option (further details in Evidence Base) Option 0: doing nothing would not change the current trends. Pensions risk would continue to be concentrated with the individual member existing DB schemes would continue to close, with DC schemes being opened in their place. Discussions with employers and consumer groups demonstrate demand for risk-sharing. Individuals generally find it difficult to understand and bear pensions risk and so some degree of risk sharing is desirable consumer research also indicates a desire for certainty in pension outcomes that DC plans do not currently provide. The current legislative framework inhibits risk-sharing both in variety and extent with employers effectively forced to choose between DB or DC. The only way to change this is to create a framework for risk-sharing schemes via Option 1: bringing in new legislation that specifically defines such risk-sharing schemes in UK pensions law. A non-legislative approach is therefore not an option to deliver this policy intention. The legislation will also for the first time define collective benefits in order to allow schemes to offer them in the UK something which is not currently possible. Will the policy be reviewed? Yes If applicable, set review date: 2019 Does implementation go beyond minimum EU requirements? Are any of these organisations in scope? If Micros not exempted set out reason in Evidence Base. Micro Yes < 20 Yes N/A Small Yes Traded: Medium Yes What is the CO 2 equivalent change in greenhouse gas emissions? (Million tonnes CO 2 equivalent) I have read the Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impact of the leading options. Large Yes Non-traded: 8 Signed by the responsible: Date: 11.04.2014
Summary: Analysis & Evidence Policy Option 1 Description: Introduction of legislative framework for Defined Ambition pension schemes FULL ECONOMIC ASSESSMENT Price Base Year COSTS ( m) PV Base Year Time Period Years Total Transition (Constant Price) Years Net Benefit (Present Value (PV)) ( m) Low: High: Best Estimate: Average Annual (excl. Transition) (Constant Price) Total Cost (Present Value) Low 0 0 0 High 0 0 0 Best Estimate 0 0 0 Description and scale of key monetised costs by main affected groups Other key non-monetised costs by main affected groups The legislative framework is intended to create a clear DA space in legislation to encourage innovation in risk sharing, enable collective models, and ensure appropriate regulation according to scheme type (DB, DC and DA). The DA framework introduces more choice for members, employers and pension providers. The introduction of the new framework may create some costs for all current schemes as they need to assess how the new definitions apply to them and identify themselves under the new framework (as DB, DC, or DA). We will be drafting the legislation to make this as simple as possible, and considering how to support delivery via commencement of primary provisions to minimise these costs. BENEFITS ( m) Total Transition (Constant Price) Years Average Annual (excl. Transition) (Constant Price) Total Benefit (Present Value) Low 0 0 0 High 0 0 0 Best Estimate 0 0 0 Description and scale of key monetised benefits by main affected groups Other key non-monetised benefits by main affected groups The main benefit of the new DA framework is that it will allow for the creation of a new class of pension schemes that share pension risks between members, employers, and pension providers. This will increase the degree of certainty and stability in pension outcomes for members, in comparison to a counterfactual of DC pension provision. Depending on the market response to the introduction of the DA framework, this could result in greater provision of schemes in the market which could benefit members, employers and insurance companies. The greater specificity about the regulation of risk sharing schemes may reduce costs to providers and schemes already operating in the risk sharing space. Key assumptions/sensitivities/risks (%) Discount rate 9 BUSINESS ASSESSMENT (Option 1) Direct impact on business (Equivalent Annual) m: In scope of Measure Costs: 0 Benefits: 0 Net: 0 Yes Zero net cost
Evidence Base Problem under consideration 1. Longstanding trends in the UK workplace pension system have resulted in a shift of all the risks in pension saving from employers to individual members. The practical consequence of this has been a significant increase in the level of uncertainty that individuals face in relation to their income in retirement, which depends directly on economic, financial and demographic factors. This can impose severe costs on individuals, particularly if their retirement income prospects change significantly due to these factors just prior to retirement. It is legitimate to question the sustainability of this systemic shift of risk to the individual. The current structure 2. Currently defined benefit (DB) and individual defined contribution (DC) structures dominate the workplace pensions market. o DB typically takes the form of a workplace pension in which an employer promises an income in retirement, or a specific level of pension savings, based on a formula related to the person s salary and/or the length of time they have been in the scheme. o DC a pension scheme that provides benefits based on the contributions invested, the returns received on that investment (less any charges incurred) and if the pension is used to buy an annuity or provide an income via a drawdown product - the rate at which the final pension fund is converted into a retirement income. 3. A key difference between these scheme types is who bears the risks. In DB schemes, the longevity, investment and inflation risks are borne by the employer who sponsors the scheme. However, in DC schemes, the individual scheme members bear the investment risks and also have no certainty of the size of their income in retirement. The Shift Decline of DB schemes employer sponsored schemes where benefits accrue on a specified basis 4. DB schemes are in decline. The chart below shows the picture since the mid-1990s, although the decline has been going on for much longer. Chart 1: Active membership of private sector DB schemes by scheme status 6 5 Closed to new members but open to new accruals by existing members Open to new and existing members Millions of members 4 3 2 1 0 1995 2000 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Occupational Pension Schemes Survey, ONS, various years. 10
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 5. This illustrates the decline in membership of private sector DB schemes in recent years. Total active membership of DB schemes peaked in the 1960s at 8.1 million, and has fallen to 1.7 million by 2012 with membership of open DB schemes dropping by 300,000 in that year alone (from 900,000 to 600,000). 6. This decline has been driven by rising costs of DB provision in turn due to rising longevity, falling bond yields, more volatile financial markets and regulatory changes that have tightened the framework under which pension promises are funded. The following chart shows how costs have grown since the early 1990s. Chart 2: Employer contributions to funded DB pension schemes 30,000 25,000 Employers normal contributions Employers special contributions 20,000 million, 2012 prices 15,000 10,000 5,000 0 Source: MQ5 - Investment by Insurance Companies, Pension Funds and Trusts, ONS Notes: Chart shows employer contributions to self-administered pension schemes this is all funded DB provision and therefore includes the funded public sector schemes. However, the vast majority of these costs relate to private sector schemes. Normal contributions are those which are calculated to cover the cost of benefits on an on-going basis. Special contributions are those made to close any deficits that open up over the course of market cycles Growth of DC 7. This decline in workplace DB provision has been accompanied by a growth in workplace DC provision, particularly in the contract-based sector of the market, in which employers facilitate the provision of a pension and pay in contributions, but the contract exists between the individual scheme member and the pension provider. This change in the structure of the UK pensions market is shown in the chart below. 11
Chart 3: Proportion of private sector employees with workplace pensions by type of arrangement 50 45 40 35 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Occupational defined benefit Group personal and group stakeholder Occupational defined contribution Any pension Source: ONS, 2012 Annual Survey of Hours and Earnings (UK) 8. Given the long-standing nature of the DB-DC shift, it is expected that the vast majority of people automatically enrolled into workplace pensions under the Government s pension reforms will be saving into DC pension plans. 9. The implication of this shift from DB to DC is that all the risk inherent in pension saving investment, inflation and longevity has been shifted from the sponsoring employer to the individual. The corollary of this is that the level of uncertainty over future pension outcomes faced by members is very high. An example of this is shown in the chart below, which illustrates the degree of uncertainty faced by individuals saving in DC pensions, who have a 90 per cent probability of ending up anywhere within the range shown on the chart in comparison to the certainty provided by DB pension wealth, which builds up smoothly over time. 12
Chart 4: Accumulation of wealth in pensions a comparison of DB with DC 3,000,000 Value of pension wealth (, current prices) 2,500,000 2,000,000 1,500,000 1,000,000 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile 95th Percentile 75th Percentile 500,000 50th Percentile 25th Percentile 5th Percentile 0 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 Age Source: DWP modelling. Notes: Based on an individual saving continuously into a DC pension for forty years with a constant annual rate of contributions. DC asset allocation is based on a typical lifestyle fund, with a shift from equities into fixed income and cash beginning ten years before retirement. Gap in the current pensions market Providing greater certainty for members in the DC pension environment 10. For many employers and employees the future is DC pension provision. This can be the right product for some, but traditional DC pensions do not provide certainty to scheme members in relation to pension income. 11. Since individuals generally find it difficult to understand and bear pensions risk and consumer research (see below) indicates a desire for certainty in pension outcomes that DC does not currently provide, there is currently a significant gap in the DC market for risk-sharing pension products that allow providers, insurers or employers to provide forms of guarantee for members at an acceptable cost, and for that cost and the value of the guarantee to be communicated simply and clearly. Rationale for intervention 12. The current legislative framework means that on the whole employers have to choose between offering DB or DC pensions, because the legislation recognises little in the way of alternative scheme types. Without Government intervention therefore, different pension arrangements that provide greater risk sharing are highly unlikely to be offered. The Government s proposals will make it easier for pension providers and employers to offer workplace pensions that give members more certainty than DC schemes. This therefore builds a middle ground for risk sharing in workplace pensions striking a balance that does not leave either individuals or employers shouldering all the risks of pension saving. Policy objective 13
13. The Government set out its ideas for a new legislative framework in its November 2013 command paper Reshaping workplace pensions for future generations. 1 The ideas in that document were produced in collaboration with a series of working groups from the pensions industry and reflect the needs and desires of employers offering pension provision and the employees who will benefit from these pension schemes. 14. Following that collaborative process, the Government is now bringing forward legislative proposals that are designed to facilitate greater risk sharing in workplace pensions through a legal framework that will allow more choice for pension providers and employers on the type of workplace pension schemes offered to employees. The Government proposes to encourage the pensions market to develop new types of pension provision in the form of DA schemes through explicit recognition of such schemes in the legislation and through clarifying the legislative framework for different types of pension schemes (DB, DC and DA). Description of options considered (including do nothing) The counterfactual the continuation of the DB-DC shift and the increased concentration of pensions risk with the individual 15. The problem defined above makes clear that in the absence of any action, the cost of DB provision means that it will further decline, to be replaced by DC provision, with a resulting transfer of all pensions risk to the individual. This will lead to significant uncertainty for individuals over their future levels of retirement income. 16. The Government s recent Budget reforms also underline the need for further action to make real choices available. The overarching Defined Ambition (DA) legislative framework 17. We propose legislation to enable the creation of Defined Ambition (DA) schemes. This means creating new definitions for DA, DB and DC schemes (incorporating Money Purchase Scheme definition). The legislation will also for the first time define collective benefits in order to allow schemes to offer them in the UK something which is not currently possible. By moving away from the polarity created by existing definitions, giving explicit recognition in legislation to the potential for innovation in risk sharing in the middle ground, these changes will give pension providers and advisers more space to innovate, and thereby provide employers and individuals more choice over the type of pension scheme they use. 18. The creation of a new legislative framework creates the space in legislation for DA schemes that allow for greater risk sharing and gives the member greater certainty over outcomes than a pure Defined Contribution scheme. 19. There is the possibility that the creation of the legislative framework will create some costs for current schemes arising from the changes - in relation to the need for schemes to identify themselves under the new framework. These are detailed in paragraphs 30 and 31 below. 20. The Government does not intend to prescribe the features of the DA models in legislation the intention is to create the space to enable market innovation in product design. The models previously discussed in the Government s Reshaping workplace pensions for future generations command paper are simply used to start testing what current legislative barriers might impede innovation. The models do not describe every possible form of DA. Monetised and non-monetised costs and benefits 21. The creation of a new legislative framework will give providers and employers more choice in pension provision. The net social benefit from creating the Defined Ambition framework is to provide individuals with increased certainty about their future pension income than is currently the case, given the counterfactual of the continuing shift to DC provision. This increased certainty will ultimately make it easier for individuals to plan for their retirement and see clearly how much they need to save for the type of retirement that they wish to have. Non-monetised benefits the introduction of the Defined Ambition legislative framework 1 'Reshaping workplace pensions for future generations' (Cm 8710), DWP, November 2013. Available to download at https://www.gov.uk/government/consultations/reshaping-workplace-pensions-for-future-generations 14
22. The existing UK workplace pensions legislative framework is, broadly speaking, binary in nature with employers only able to choose between offering DB and DC schemes. While there does exist the possibility for some limited forms of risk sharing pension provision such as Cash Balance and hybrid schemes, industry stakeholders have highlighted that the lack of legislative clarity around risk sharing schemes more generally is likely to have limited innovation in this space. 23. The introduction of a new legislative framework for Defined Ambition schemes will, for the first time, provide the legislative clarity needed to encourage both new and existing risk sharing options. This Impact Assessment does not consider the precise impacts of the different designs of pension schemes because what the Government is introducing is a new legislative framework that allows the market to develop a range of innovative new scheme designs (i.e. DA schemes). It is not requiring employers to offer DA pension models; ultimately the scheme design selected is a matter of choice for the employer. The employer is not required to bear more risk through the introduction of this legislative framework however they are likely to benefit from greater scheme choice. 24. These new scheme types are designed to provide the employer with greater flexibility and control over pension-related costs while still allowing them to provide a degree of certainty to their employees in respect of pension outcomes. There may be financial benefits (uncertain in nature) accruing to sponsoring employers where the counterfactual is a DB scheme (since the cost of all these risk-sharing options is expected to be lower than existing DB provision); where the counterfactual is a traditional DC scheme, the main benefit to the employer comes via the ability to offer increased certainty to their employees without taking on any formal pensions liabilities. In general the evidence provided by the long-standing shift from DB to DC pensions in the UK, and elsewhere, shows that the counterfactual for most employers will be DC provision. Enabling schemes that create less liabilities for employers (than defined-benefit schemes) 25. The proposed new legislative framework creates the space within the current legislation for employers to offer DA schemes to their employees enabling employers to limit their risk in comparison to DB schemes. The proposals will not affect DB legislation and all existing rights under DB pensions, and their associated protections, will remain unchanged. 26. We have also heard expressions of interest in new forms of risk-sharing from employers who are concerned that traditional DC schemes may create workforce management problems for them in the future if employees cannot plan or afford to retire with any certainty. There is therefore an intangible, but important, benefit for employers from these proposals. 27. The proposed legislation would also enable the creation of schemes that offer collective benefits. Schemes that offer collective benefits may take different forms and come with different levels of guarantee (including none at all). For the employer sponsoring schemes that offer collective benefits (as with money purchase schemes) their liability is limited to the employer contribution (unless the employer itself chooses to stand behind any guarantee offered). The employer therefore does not bear any of the investment, inflation or longevity risks which are associated with other non-money purchase schemes. Greater certainty of pension outcomes for employees relative to a defined-contribution scheme 28. The value placed by people on greater certainty in pension outcomes is an inherently subjective variable which will differ on an individual basis. It is therefore impossible to quantify the benefits. However, it is known that individuals value greater certainty in pension provision for example the Attitudes to Pensions survey 2 shows people tend to be risk-averse with their saving; over two-thirds of respondents agreed with the statement that it is better to play safe with your savings, even if investing in higher risk investments could make you more money, while just eighteen per cent took the opposite view. This view varied little between those with different levels of pension knowledge. On the basis of evidence such as this, it can be inferred that the sharing of risk and the provision of greater certainty, will bring a genuine benefit to individuals in comparison to the often random fluctuations and huge uncertainty of outcomes in existing DC schemes. Greater clarity of scheme type for employers and employees 29. The proposed legislation aims to distinguish between DB, DC and DA schemes to allow schemes to be transparently regulated according to type. This distinction will provide greater clarity for employers and employees in terms of scheme type and the corresponding liabilities. 2 Attitudes to pensions: The 2009 survey, DWP research report no. 701, 2010. 15
The trade-off between greater certainty of pension outcomes and the cost of guarantees 30. The benefit to members comes in the form of increased certainty in pension outcomes compared to DC schemes, through the provision of formal guarantees or promises by some counterparty, which could include insurance companies, for example. It should be noted that this increased certainty comes at a cost to the member because the provision of certainty requires a counterparty to bear some risk. In particular, a guarantee provider will use the financial markets to make investments that will be used to back the guarantee. If these investments do not deliver, in the event of the guarantee biting, the guarantee provider must make good on the guarantee. This risk imposes a cost on the provider and so they will charge a premium to the guarantee purchaser to reflect this risk. This guarantee charge will reduce the return on the product being insured. Direct costs and benefits to business calculations 31. Through the introduction of the DA framework we expect some costs for schemes to arise from the changes. There is the possibility of some costs for all current schemes arising from the proposed changes these arise from the need for all current schemes to assess how the new definitions apply to them and identify themselves under the new framework. We do not have reliable information to quantify the costs or benefits of the primary proposals. The main benefit will be to give employers more choice and flexibility over their pension arrangements. For individuals, the benefit is the increased certainty and stability of pension incomes derived from DA schemes relative to DC schemes. 32. We will be drafting the legislation to make this as simple as possible, and considering how to support delivery via commencement of primary provisions to minimise these costs. Wider impacts 33. By creating a legislative framework for pensions in the UK, employers will have greater choice and flexibility over scheme design and individuals will see a greater degree of certainty in their pension income than is currently on offer in existing DC schemes. Such benefits may even make pension saving more attractive, with the potential of an increase in the overall level of savings. 34. There may also be a wider macro-economic benefit because some of the pension scheme designs that could be made possible under a Defined Ambition legislative framework would be better suited than existing DC provision to investing for the longer term in illiquid assets such as infrastructure, which are hard for retail investors such as DC pension savers to access. Small Business Assessment 35. The Government believes that small and micro-employers should have access to the full range of pension scheme options available to other employers with employers free to select the scheme design that suits them best. With the roll-out of automatic enrolment we expect the majority of small employers to provide DC schemes meaning the introduction of this legislative framework will not have any impact on the majority of these schemes, other than to offer them alternatives which they may or may not wish to take up. Summary and preferred option with description of implementation plan 36. As discussed above, the Government s intention is to create a framework to enable DA pension schemes. Introducing the DA legislative framework will require primary legislation and will be achieved through a Private Pensions Bill in the Fourth Session of Parliament.The Government would then anticipate the Bill receiving Royal Assent before the end of the Fourth Parliamentary Session. 16