A defined ambition scheme that would work

Members want two things from their pensions, a decent retirement when they knock off work and certainty that they’ll get it during their working lives.

It is extremely expensive to achieve these things and beyond the means of most people. If it costs £175,000 to privately replicate the BSP and that is seen as “nugatory” (Michael Portillo), it’s not hard to see that most people’s DC planning will get nowhere near the replacement ratios many expect (2/3 final salary is still hard coded into expectations).

For any defined ambition scheme to work, there needs to be a proper understanding of the cost of self provision , a proper understanding of how collective pension schemes provide better value and a proper understanding that without the committment of the member to co-funding their retirement, expectations will not be met. In short, some members need to be woken up to smell the coffee!

Employers need a pension scheme that is regarded as a genuine employee benefit. Staff are getting tired of mutton dressed as lamb schemes which look good on a flex program but under-deliver. Employers want to provide the real deal, a pension that will deliver whatever the economic circumstances , that is trusted by staff and is a genuine means of enabling staff to retire when the time is right.

But employers are not going to take onto their balance sheets , risks that they cannot control. Most employers are prepared to take a degree of market risk since assumptions into economic growth are hard-baked into their business models – if it has confidence in the assumptions it is using to manage itself, it should be confident of the assumptions that underpin the growth in assets of the pension scheme.

Employers are no longer  prepared to take longevity risk onto its balance sheet. This is not just a knee-jerk reaction to what has happened to longevity over the past twenty, fifty and a hundred years. It is a fear of the “unknown unknowns” the impact of genetics, changes in nutrition and other improvement in people’s lives that makes predicting the duration of the annuities paid to those in retirement an uncontrolled and potentially business threatening risk.

While the investment of money for a member’s retirement is a reasonable way to reward service, there is no obvious reason why a company should insure its ex-employees against them “living too long”.

My solution for DA splits the provision of a retirement income into two parts. The employer signs up to provide a cash balance for its pension scheme members that beats minimum standards (in line with the Qualification standards for hybrid schemes under AE). In exchange for “going the extra mile”, the company and its staff are rewarded by accessing a scheme pension provided by a ring-fenced section of the  Pension Protection Fund. The Scheme pension is paid at the published GAD rates for scheme pensions which are currently some 40% better than the best open market rates available to individual annuities.

Should companies wish to, they could provide fixed term annuities which would dovetail with the PPF lif etime scheme pensions. The cost of purchasing the Scheme Pension would reduce depending on the duration of the annuity and would fall to nothing at a fixed point (I suggest the 90th bithday of the member). The Government must stick up its hand to be the insurer of last resort for super-longevity, there is no other counterparty.

The upshots of this proposal  would not only be that members get certainty on the cash balance (underwritten by their employer) but also certainty on the annuity conversion factor. More important still, there would be a certain uplift in pension payable by using the GAD scheme pension rates.

Many will question whether a 35% uplift in pensions can be provided without strain on the PPF. Such questions should properly be addressed to GAD and no doubt would be answered by GAD with reference to the efficiencies a pension fund achieves by paying its pension from a fund.

If you want to explore the arcane world of GAD rates and the fiddling that went on the last time they were set – please be my guest- you will find the detail entertainingly dealt with here


  • The fund continues to enjoy exposure to real assets (rather than invest purely in bonds)
  • The complex regulations surrounding reserving for guarantees (Solvency II) , EU gender rates do not apply to scheme pensions paid from the fund
  • Mortality is pooled rather than individually underwritten creating underwriting efficiencies.
  • There are further efficiencies in running a “pension payroll” rather than administering individual annuity policies.

I argue that the transference of the cash balances into the PPF and the payment os scheme pension from the collective asset pool these cash balances creates is  pragmatic way of replicating the best of defined benefit in a way that employers will find acceptable.

The employer is able under this system to take certain acceptable risks onto the balance sheet but is not exposed to the impossible to measure risks of member longevity. Employers will benefit from employer’s expectations , realised at retirement in terms of improved morale, retention, productivity and recruitability. Importantly, the company could engage in constructive dialogue with staff at retirement, centering on the value of the pension on offer.

It could be argued that this approach favours large organisation, but I see no reason why it could not be adopted by multi-employer DB plans such as the Pensions Trust and the MNOPF.

From the member’s viewpoint, my approach aggregates corporate and state benefits in what could be a single income stream in retirement. That this is being paid by the Government should give extra confidence in retirement. During employment , members can see certainty in accumulation and some certainty in the pension conversion process.

Of course GAD rates are not guaranteed for ever and change with longevity assumptions, but with proper education, the reasons for such adjustments can be communicated, understood and accepted.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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