Government launches risk sharing consultation

It said it would look at ways to share risks such as investment performance and increasing life expectancy – which it said could make pensions more expensive for employers to fund.

And it is also seeking views on whether greater risk sharing could be accommodated without major changes to the existing legislative framework.

Work and Pensions secretary James Purnell said: "We know that providing defined benefit pensions can be expensive for employers and we want to explore how risk sharing can help them to continue to provide good schemes.

"We want to encourage innovation and growth in the market. But we also need to strike a balance between reducing costs for employers and protecting members’ benefits."

The consultation also looks at some new approaches which would require significant changes to the legislative framework before they could be introduced. These include

• Conditional indexation schemes which would allow inflation protection to be reduced or removed in years when the scheme was not sufficiently well-funded.

• Collective defined contribution schemes where the employer pays a fixed contribution into a collective fund instead of individual savings accounts – allowing risks to be shared between members.

Purnell said the DWP also intends to amend the current Pensions Bill to abolish the protected rights "survivor’s benefit" rule.

This rule currently requires an individual with a spouse or civil partner, at the point of annuitisation, to use any contracted-out rights in their pension pot to purchase a joint life annuity.

Purnell said that, depending on their personal circumstances, a joint life annuity may not be in a couple’s best interests – for example if they both have built up good pension pots.

He said: "Our aim is to make the pensions system as simple as possible and we’ve already announced that contracting out for defined contribution schemes is to be abolished.

"This is planned for 2012. Removing the survivor’s benefit rule will mean that one set of rules will cover the whole of someone’s pensions saving, and there will be less red-tape for pension providers.

"The key thing is that pension scheme members have the information they need to make informed decisions on annuity purchase - including whether to purchase a joint-life annuity to ensure their partner will be provided for. We’ll continue to work with the Association of British Insurers, Financial Services Authority, the Pensions Advisory Service and other stakeholder groups to help people understand the consequences of their decisions."

The deadline for responses to the consultation is August 28, 2008.

The consultation document is available on the DWP website.