(April 3, 2014) — A number of challenges will have to be overcome to make Defined Ambition (DA) pension funds a reality, including enforced certification by the Pensions Regulator, according to law firm Slaughter & May.
A white paper produced by firm partners Philip Bennett and Sandy Maudgil has identified the key amendments to UK legislation that would be needed to make Defined Ambition pensions—the UK’s answer to collective defined contribution—a reality.
Among their assertions are the belief that the Pensions Regulator would have to issue certificates specifying that the scheme qualifies as a DA pension. This would mean that legislation would exist to allow the fund to benefit from the same exemptions that apply to money purchase funds in relation to employer debt and key aspects of funding the pension.
In a nutshell, the regulator certifying these DA pensions would ensure that they satisfied certain requirements which money purchase funds already subscribe to, namely:
(a) the fund is established under “irrevocable trust”, meaning no payments could be made from the fund other than authorised member payments and certain scheme administration and compensation payments. Employers would have no rights to surplus from the scheme.
(b) there is a pooling of risk and reward.
(c) the scheme provides no guarantee of a given level of benefits, no cover against biometric risk, and no guarantee of investment performance.
(d) employer contributions are fixed at a specified amount or rate and, subject to any contractual commitment, the employer may terminate its obligation to contribute on notice in writing to the trustee.
(e) the employer has no liability to pay any further amounts to the scheme (other than if there’s a contractual agreement to do so, or where the employer has elected to contribute towards the expenses of the DA fund).
(f) the scheme is a registered pension scheme.
(g) the benefits provided for members are benefits that would constitute authorised member payments under Section 164 of the Finance Act 2004.
(h) adequate arrangements have been made in relation to the scheme for the governance of the fund, the management of the investment strategy, and the management of risks.
The fund would also have to prove there was at least a reasonable prospect of the target level of benefits being delivered, something which the paper’s authors believed would be consulted upon with the industry.
In addition, a Pensions Regulator certificate would also negate concerns about the government moving the goal posts at a later stage.
Bennett and Maudgil noted that the certificate would provide legal certainty of the position while recognising that Parliament’s future powers may not be restrained.
The lawyers also believed that the trustee board in charge of DA pensions would follow a rule where no less than third and no more than half of them should be from the employer, with the same rules applying for those representing members.
And that while initially, the benefit design would be guided by the employer and the actuary, with an emphasis on keeping costs to a minimum, at a later stage the goals would change.
Bennett and Maudgil predicted the trustee board would evolve, leading to either an investment committee being established or particular risk management expertise being brought in-house.
Finally, on transfers in to the fund, the paper predicted that DA funds would not market themselves to accept transfers from those not employed by the sponsoring employer, and that members would be limited to transferring other assets into the DA fund to a one month annual transfer period, unless otherwise determined by trustee board.
And for transfers out, the member would only be able to transfer out within 12 month of their employment ending, or when they wanted to start their pension payments.
In addition, unlike in a money purchase fund – if the member’s target benefit has come into payment, the member would have an opportunity to transfer out once every five years.
The restrictions would allow DA pensions to invest in illiquid investments without the scheme being a forced seller to create liquidity.
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