As we noted in our June 2008 update, the DWP recently published a “Risk Sharing” consultation to canvass opinion on how employers can continue to maintain good occupational pension provision through greater risk sharing with scheme members.

Following the closing date for responses to that consultation on 28 August 2008, a number of respondents’ views have been made public. The Association of Consulting Actuaries has called for new types of risk-sharing and new scheme designs to be encouraged by legislation as a suitable alternative to defined contribution (money purchase) schemes. The Pensions Management Institute has called for the removal of detailed regulations that govern pension provision. In a rather pessimistic response, the Pensions Policy Institute argues that the potential gains from risk sharing are “theoretical”. A full summary of responses is due from the DWP within 3 months.

In addition, and to coincide with the closure of the consultation period, the DWP has published a report entitled “Employer Attitudes to Risk Sharing in Pensions Schemes: A Qualitative Study”. The report states that employers are unlikely to take up new risk-sharing models in the event that the Government provides the relevant legislative framework. The report also states that no employers had plans to introduce a risk-sharing approach, although it did find that the awareness of risk-sharing approaches was low. Unsurprisingly, most of the employers whose views were presented in the report were concerned with the costs involved in introducing risk-sharing. They also had concerns about the difficulties of communicating the risk-sharing concept to employees.

Comment: with the acceleration in closures of existing defined benefit schemes in the private sector, there is an urgent need to allow employers the maximum flexibility to offer risk-sharing schemes when reviewing their current pension arrangements. If risk-sharing is not encouraged by new legislative provision, it is likely that more employers will change to defined contribution provision, exposing more employees to pension volatility.

View the report (293KB)(pdf).