The Pension Schemes Act 2015 received Royal Assent on 3 March. Stated by the government to be a “revolution in pension scheme design, which could transform the retirement prospects for millions of younger workers”, it aims to provide greater clarity for pension savers as well as protection for those taking advantage of the new pension flexibilities available from 6 April 2015. The Act is also intended to give employers greater choice in the pensions they offer as well as for savers in how they access their pension savings.
The key provisions of the new Act are set out below.
Introduction of shared risk (or defined ambition) schemes
Defined as schemes with a pensions promise in relation to at least some of the retirement benefits but which are not defined benefits schemes. Defined ambition schemes are intended to be a half-way house between defined benefits (DB) and defined contributions (DC) schemes, giving employers the opportunity to offer their employees a bit more certainty than with a pure DC arrangement but without taking on all of the risk of a DB arrangement. There are number of ways this can be achieved, for example, the employer could offer a money back guarantee on contributions paid or guarantee that the member’s pension pot will be a particular size at retirement. The introduction of these schemes undoubtedly offers considerable scope for flexibility but whether employers will have the appetite to take on any kind of risk when it comes to pensions’ provision remains to be seen.
Introduction of collective benefits schemes
These schemes provide for members’ assets to be pooled allowing access to a greater range of investments, thereby reducing risk. On retirement, members take an income directly from the asset pool rather than buying a retirement annuity. It is anticipated that these will be popular as a means of reducing employee risk and improving outcomes without employers having to take on board additional risk.
New pension flexibilities and member protection
The Act also contains provisions relating to the new flexibilities that will be available to DC pension savers from 6 April 2015, allowing members to access their DC pension pots in full once they reach normal minimum pension age (currently 55). Notably, the Act introduces important new protections for members opting to take advantage of the new flexibilities from April, which include the following:
- Trustees will be required to check that members have taken appropriate independent advice before transferring or converting DB benefits to DC benefits.
- A new guidance guarantee will be introduced to ensure that everyone with a DC arrangement is offered free impartial guidance on their options at retirement. To be known as Pension Wise, this will offer online, phone and face to face guidance to members.
- It will be a criminal offence to pretend to offer official Pension Wise guidance.
These changes represent real reform with the opportunity to reinvigorate retirement saving. The trick will be in ensuring risks for members and savers are adequately and properly covered.