Last November we reported on the Government's proposals for defined ambition pension schemes. A somewhat watered-down version of those proposals is contained in the Pension Schemes Bill (the Bill) which is currently working its way through the parliamentary process.

You can read the Bill and follow its progress here

The Bill introduces three new categories of pension scheme:

  • Defined benefit (DB) scheme – where there is a "full pensions promise" of a pension payable for life based on a fixed retirement age.
  • Shared risk scheme – where there is a "pensions promise" in respect of some benefits but it is not a defined benefit scheme.
  • Defined contribution (DC) scheme – where there is no pensions promise about the level of benefit.

The new definitions are to apply only where expressly stated in legislation. Areas where they are likely to be used include revaluation, indexation and transfer values.

Traditional final salary and CARE schemes are likely to fall into the defined benefit category. "Full pensions promise" is defined as a promise, at all times before it comes into payment, about the level of benefit and where the benefit is determined wholly by reference to that promise.

The "pensions promise" for a shared risk scheme is a promise about the level of benefit. This will include a promise about factors used to calculate the benefit. This category is likely to include cash balance and collective DC schemes.

The current definition of money purchase scheme will remain within the new defined contribution scheme definition.

Many schemes will provide benefits in more than one of the new categories. Where this is the case, they will be treated for the purposes of the new legislation as if they were two or more schemes, each one fitting within a category. So a DB scheme with money purchase AVCs will be treated as being split into a defined benefit scheme and a defined contribution scheme.

The definitions are very widely drawn. We envisage that there will be grey areas and some schemes may struggle to identify the categories into which their benefits fall. It is unlikely that these provisions will come into force before April 2016 and we hope that, before then, detailed guidance will be provided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.