Bandwagon The BWCI Group Newsletter
Extract from the Quarter 4 - 2013 edition of Bandwagon
How do you define ambition?
Pension Scheme Risk
Longevity risk - the risk that
people live longer than expected
in retirement, making retirement
provision more expensive than
budgeted for.
Market risk - the risk that market
forces contrive to make saving for
retirement more expensive at an
inopportune time.
Investment risk - the risk that funds
that are invested for use in retirement
do not achieve the returns expected.
The long term nature of retirement planning
means that inevitably risks are involved. There
can be no guarantee that all interested parties
will achieve their long term desired outcomes.
While there are methods of mitigating these
risks to some extent, they are not always 100%
effective and often come at a price.
Currently occupational pension schemes
fall broadly into one of two types: defined
contribution (DC) schemes (also known as
money purchase schemes) or defined benefit
(DB) schemes (eg final salary schemes).
DB and DC schemes lie at either end of the
risk scale in terms of who bears the risk. In DC
schemes the risks are borne by the member,
while in DB schemes the employer takes the
majority of the risks.
DC
Scheme
DC Scheme with
Moneyback
Guarantee
Defined ambition
But might there be some middle ground?
There is increasing interest in the concept of
a “defined ambition” scheme, where risks can
be shared in a more equitable fashion between
the different stakeholders (eg government,
employer, employee, insurers and pension
providers)
The theory is that under a defined
ambition (DA) type arrangement members
are provided with a more certain retirement
outlook while scheme sponsors reduce much
volatility and uncertainty in their balance
sheet and income statement.
Potential
New DA
Scheme?
CARE
Scheme
DB
Scheme
Employer Risk
Risk
“The idea of defined
ambition is really
still in its infancy and
therefore the ideas
and concepts are still
taking shape.”
Matt Stanbury
Employee Risk
Type of Scheme
What might DA arrangements look like?
The idea of DA is really still in its infancy and
therefore the ideas and concepts are still taking
shape. In the UK the DWP has released a report
entitled “Reinvigorating workplace pensions”
which discusses DA schemes. Most of the
current thinking around DA schemes takes
either the traditional DB or DC scheme model
as a starting point and applies some kind of
innovation or adjustment, with the aim of
producing a more even spread of the risks.
Some examples of potential adjustments to
the DB model are:
 R
etirement age that is linked to state
pension age
 R
evaluation and indexation that is
dependent on scheme funding level
 P ensions in payment dependent on funding
level
 S mall core DB element with discretionary
supplement
Some examples of potential adjustments to
the DC model are:
 G
uarantee to receive at least contributions
back
 Introduce minimum level of investment
return
 Introduce a guarantee to cover retirement
income in later year
These examples are not an exhaustive list of
the ideas that have already been suggested as
to how risk sharing could be better achieved.
However, they cover the most common
themes. There is definitely scope to add to
this list with fresh innovative ideas before it is
perhaps narrowed down to the most workable,
practical solutions.
Continued over/..........
Extract from the Quarter 4 - 2013 edition of Bandwagon - continued
Challenges for defined ambition schemes
In order for the idea of risk-sharing through
defined ambition schemes to take off beyond
the low-key “hybrid” or insurance solutions
that have been seen so far (such as CARE
schemes, cash balance schemes or the use of
with-profits policies) there are several barriers
to overcome. Firstly, it will be important
that the various parties (and in particular
employees and employers) are engaged in the
process.
There may be other barriers to overcome
along the way, not least the issue of fitting
new pension scheme designs into a regulatory
framework, including auto-enrolment
compliance. However, this is perhaps one area
where the Channel Islands have an advantage
over their UK counterparts, as we have no
regulator and are arguably able to legislate
more quickly than in the UK. Thus there is
perhaps more immediate scope for innovations
of this type locally.
From a scheme sponsor’s perspective this
means ensuring that potential pension
arrangements provide value for money and
certainty of cost. A sponsor may be willing to
spend more on retirement provision for its staff
if the cost was not too volatile and it led to
better recruitment and retention of staff.
Conclusion
It is important to avoid providing solutions
that are too complex. Complexity has proven
in the past to be a key stumbling block to
engagement. Any solutions also need to stand
the test of time, providing all stakeholders with
more certain outcomes.
However, this may only happen if the staff
in question value retirement provision. This
is perhaps the key issue that needs to be
addressed. All pensions surveys conducted
recently regarding the UK pensions industry
tend to paint a similar picture amongst the
general public of lack of understanding, shorttermism and lack of trust towards the industry.
The Institute and Faculty of Actuaries have set
up a working party, with the aim of providing
some clarity on the issue of DA from an
actuarial perspective. A paper is expected to be
published some time in 2014.
If these issues can be addressed and people can
be persuaded that retirement saving should
be higher up their priority list then defined
ambition schemes may have a future.
Location
Tel
Fax
Web
PO Box 68, Albert House
South Esplanade, St Peter Port
Guernsey, GY1 3BY
+44 (0)1481 728432
+44 (0)1481 724082
www.bwcigroup.com­
Bandwagon The BWCI Group Newsletter
If you have any feedback on this article then
please email your thoughts to
[email protected]. As a member of
the Institute’s newly formed defined ambition
working party I will ensure that any relevant
comments are brought to their attention.