Slaughter and May updates legislative framework for defined ambition collective DC schemes

Slaughter and May updates legislative framework for defined ambition collective DC schemes.

  • The Queen’s Speech on 4 June 2014 paves the way for legislation
  • Updated "straw man" paper sets out legislative framework required for Defined Ambition Collective DC schemes to become a reality in the UK
  • Paper incorporates feedback from Association of Pension Lawyers and other industry observers
  • A launch pad for discussion and debate within pensions industry to help make defined ambition collective DC schemes a workable option for employers

Slaughter and May has issued an updated version of its "straw man" discussion paper for a possible legislative framework for defined ambition schemes, also known as collective DC schemes or target benefit schemes.

The earlier paper was issued at the end of March 2014 and has now been updated to reflect extensive and constructive feedback from other legal commentators and industry observers. It has also become clear from last week’s Queen’s Speech (4 June 2014) that the Government is planning to enact framework legislation to enable Defined Ambition Collective DC Schemes to come into being. This paper is intended to suggest how this might be done.

The idea of a "Defined Ambition Scheme" was previously covered in the DWP's 7 November 2013 consultation paper on "Reshaping workplace pensions for future generations". The DWP Consultation Paper referred in particular to research by Aon Hewitt modelling average salary replacements for different approaches to DC plans. It said in relation to collective DC schemes that "the ability to share risks amongst members does seem to create more stable outcomes than are possible in an individual DC scheme".

More recently, Pensions Minister Steve Webb has told one newspaper that defined ambition collective DC pensions give "people greater certainty and probably better value. ... it is pretty unambiguous that you will get a more certain outcome and potentially a better one." Labour's Shadow Work and Pensions Secretary, Rachel Reeves, said: "We need to do much more to boost the value of people's savings. Labour said last week we would legislate to make collective pensions schemes possible. We will, of course, support any move to go down this route."

One issue which commentators have been wrestling with to date was how the DWP would be able to define and legislate for Defined Ambition Collective DC schemes. This new discussion paper is intended to assist in that debate.

The paper - co-authored by Philip Bennett and Sandeep Maudgil, partners in the Slaughter and May pensions group, and with input from Kevin Wesbroom and Martin Lowes of Aon Hewitt on the actuarial side - takes the form of a "straw man" of what defined ambition collective DC schemes might need in terms of legislative framework in order to become a reality in the UK. It tries to suggest how a "Defined Ambition Collective DC" pension scheme might be defined.

The paper then suggests means of addressing the key concerns which would otherwise hold employers back from accepting collective DC as a concept: a lack of confidence that employer liability would be limited to paying the initial contributions which the employer signed up for; and the "recharacterisation risk" that somehow even if Defined Ambition collective DC arrangements were set up on a basis which dealt with that limited liability concern to start with, an unexpected court ruling or change in law could operate to shift the goalposts.

The paper builds on an analogy with limited liability companies to suggest that a "Defined Ambition Collective DC" pension scheme could be simply defined as a scheme which the Pensions Regulator had certified as such. That certificate would be conclusive. This could be coupled with clear statutory provisions that employer liabilities to a Defined Ambition Collective DC scheme are limited to the contributions which the employer had agreed to pay at the outset. Regarding member protection, the paper suggests that the Pensions Regulator should only certify a scheme as "Defined Ambition" if the scheme satisfies certain key member protection conditions, in particular around scheme governance and investment management. The scheme would also need to be set up on terms which made clear that its assets could only be used to provide member benefits.

The paper is being circulated to the wider pensions industry with the aim of being a launch pad for discussion and debate between stakeholders as to the shape that defined ambition schemes will take.

The hope is that, if the legal issues can be clearly identified and as simple an approach as possible put forward, then that may help an appropriate framework be put into place so that Defined Ambition Collective DC schemes can be a workable option for employers to look at when considering changes to their benefit design strategy when contracting-out for defined benefit schemes ends on 6th April, 2016. The alternative might otherwise just be individual defined contribution, which might not be right for everyone.

Sandeep Maudgil commented: "All comments on this revised paper are welcome. We really look forward to hearing what people have to say. The key objective is to find a legislative approach which is sufficiently clear and succinct so that employers and employees alike can have confidence in the system. At the same time, we want to borrow as much as possible from existing legislative approaches so that those responsible for the new legislation feel comfortable that the legislative mechanisms are not wholly untested."