Plans for pensions shake-up revealed

Mininsters have been investigating the scope for creating a new category of pensions called defined ambition (DA) schemes, which would widen choice by encouraging the growth of a “middle ground” between two very different types of pension which dominate the market – the defined benefit (DB) scheme, where the employer bears the investment risks, or a defined contribution (DC) pension, where the employee bears the risk burden.

“Gold-plated” DB schemes such as final-salary schemes are in long-term decline and have become increasingly expensive to run as people live longer. The percentage of DB schemes that are still open has more than halved since 2007 – from 36 per cent to 14 per cent.

DC schemes are the type of pension people are most likely to be placed in as the Government’s reforms to place people into workplace pensions automatically are rolled out. Under DA schemes, pension saving risks would be more evenly split between firms and employees.

Pensions Minister Steve Webb said: “Our proposals for defined ambition pensions are designed to reinvigorate workplace pensions, providing people with more certainty about what they will get in retirement.”

A range of suggestions has been put forward in a consultation paper to tackle the “market gap” between the two types of pension, which aim to give employees more certainty about their retirement outcome as well as removing regulations on employers.

The document also looks at the possibility of collective defined contribution schemes (CDC), which pool members’ assets as scheme used in the Netherlands.