Association of Consulting Actuaries proposes new pension scheme to share risk

The Association of Consulting Actuaries (ACA) has put forward a proposal for a new type pension scheme in which the risks are shared between employers and staff shared risk pension options as less volatile for staff and more cost-control effective for employers.

Its proposal,which was put to the government as part of its Deregulatory review of private pensions, outlines schemes designed to allow employers and employees share pension risks, making plans less volatile for staff and providing employers with greater cost control. The new tier of pensions would sit between defined benefits and defined contribution schemes.

Under a shared risk scheme, pensions would be based on an employee’s average earnings rather than their final salary and the pension earned for each year of service would be re-valued from that year to the date of retirement and increased when in payment (up to the 2.5% pa indexation cap in current legislation.) Each year’s pension would be a defined benefit, but future annual re-valuations would be targeted, not guaranteed.

Employers could benefit from the new scheme because, unlike existing DB schemes, they would have the flexibility to not grant a year’s re-valuation or pension increase if a past service funding shortfall emerged; reduce the rate of future service pension accrual; increase normal pension age for active and deferred members, and wind up the scheme without providing full future increases to pensions in payment.

Under current legislation, pension plans are either classified defined benefit or defined contribution which the ACA has said limits the potential to create more flexible schemes in which employers and employees could share investment and longevity risks. It added that the few occupational pension schemes which have been designed to share risk are limited in doing so because they have been classified as defined benefit schemes.

The organisation believes its proposal is an option to be considered in light of final salary scheme closure to new entrants and increasingly, to future accruals.

Ian Farr, ACA chairman, said: "By their design, these will enable employers to control costs into the future even if there are down swings in investment returns and continued improvements in mortality."