Blog

08 November 2013

Government considers changes to pension rules

The Government is looking into ways to change workplace pensions so employers are not faced with liabilities they cannot afford.

The Government is looking into ways to change workplace pensions so employers are not faced with liabilities they cannot afford.

Pensions minister Steve Webb is leading a consultation to look at an alternative to the traditional defined contribution pension schemes. The consultation document published yesterday suggests the introduction of ‘defined ambition’ schemes, which share the risk between employers and their staff.

At the moment the workplace pension schemes employees are automatically enrolled in are defined contribution. This means both the business and their workers pay into the pension and the cash is invested in the stock markets.

The money in the scheme is used to buy an annuity, income drawdown product or similar when the employee retires and it is the member of staff who faces all the risk as they are responsible for purchasing their retirement income.

Final salary pension schemes are offered by some workplaces, although they have become less popular in recent years. They see the employers take all the risks as they are responsible for paying their employees’ retirement income, effectively looking after staff wellbeing post-retirement. In these schemes, the worker is given an income based on what their salary is when they retire and how many years of service they have completed.

New schemes will act as a compromise

The proposed defined ambition schemes will act as a compromise between the two extremes of final salary and defined contribution.

Mr Webb is suggesting changes to the regulation to make final salary schemes, which are also known as defined benefit, more flexible so they are more appealing to entrepreneurs and small businesses with staff.

The proposals include removing the restrictions that mean defined benefit pensions must increase annually with inflation. The changes would mean employers would provide a pension income based on an employee’s, salary but they would not need to increase the sum each year throughout retirement or carry on paying the pension to the holder’s spouse after they have died.

These changes aim to make final salary pension schemes more affordable to companies so they will not stand in the way of business growth.

Shared risk

The new model shares the risk as employers still need to provide the retirement income but employees need to find a way of protecting themselves from future inflation and providing for their partner once they die.

Businesses may also be able to choose to raise the age at which they pay the pension out to reflect the fact that people in the UK are living for longer.

Other reforms being considered as part of the consultation are ways to protect the money employees have in their pension pot in defined contribution schemes so they have a larger amount of money to buy a product which will provide their retirement income.

This could include getting employers to guarantee that the value of the pension will never fall below the amount which has been paid in.

Speak to an independent financial advisor for advice on issues relating to your business funding and pensions liabilities.

D2 Interactive