Shared risk schemes and collective benefits
6.The Act introduces new definitions to the legislative framework for private pensions based on the type of promise about the retirement benefit that pension schemes provide for members during accumulation. The current legislation is based on a binary structure between money purchase schemes, which traditionally offer no certainty over retirement benefit, and non-money purchase schemes, which have traditionally offered salary related pension benefits. The non-money purchase scheme category can cover a range of different pension benefit designs that offer different types of promises about the retirement benefit. However, the legislation is often perceived as offering two main options, and much existing legislation is written on the basis of a polarity between these options. The Act defines three categories of pension scheme based on the different types of promise offered to members during the accumulation phase about their pension savings when they come to access them (also termed decumulation). A defined benefits scheme is a scheme in which the member has a full pensions promise about the rate of the retirement income they will receive for life from a fixed normal pension age; a shared risk scheme is one in which there is a promise about some of the retirement benefits, whether income or lump sum; a defined contributions scheme is one where there is no promise about what is being saved.
7.The Act also includes measures to enable the provision of collective benefits. Collective benefits are provided on the basis of allowing the scheme’s assets to be used in a way that pools risks across the membership. Examples of collective arrangements which are currently in operation can be found in the Netherlands, Denmark, and parts of Canada, where evidence suggests they can, when governed appropriately, provide a greater degree of stability in pension outcomes than individual defined contributions schemes.
