Actuaries call on Govt to remove indexed schemes ban

The Government should allow employers to offer conditionally indexed pension schemes, says the Association of Consulting Actuaries (ACA).

The association says the Government should remove a ban on the schemes in an amendment to the Pensions Bill, due for its second reading next Monday.

The ACA says the move would give employers improved certainty over long-term costs and give employees a more stable platform for their retirement income than through money purchase schemes. It adds it would encourage employers to offer better schemes than personal accounts.

The comments follow research by the ACA which shows four out of five defined benefit (DB) pension schemes have closed to new entrants, compared to seven out of 10 three years ago.

The association says only 900,000 private sector employees sit in DB schemes open to new employees, compared to more than five million public sector employees.

Ian Farr, chairman of the ACA, says: “All around we see evidence of employers looking for ways to cap their liabilities for the future, including ‘selling off’ their schemes to outside organisations.

“Government can check this trend with changes to defined benefit scheme legislation, requiring no extra layer of legislation.

“They can simply remove the ban on employers being able to offer ‘middle way’ conditionally indexed pension schemes – a type of scheme that prospers in The Netherlands, stabilising there the retirement incomes of millions of people.

“The Government needs to concentrate its attention on reforms that will genuinely promote good workplace pension provision at all levels – as we have said throughout; personal accounts are not intended to do that.”

The research shows private sector employers and employees have raised contributions to 29% of earnings, almost double the level five years ago.

However, combined employer and employee contributions into defined contribution (DC) schemes have levelled-off at about a third of those into DB schemes.

Almost 70% of employers believe pensions reforms would lead to a general levelling-down of pension contributions per employee while 76% believe the reforms would result in more closures of existing schemes that perform better than personal accounts.

A total of 36% of employers with fewer than 250 employees say they might abandon their existing pension scheme in favour of personal accounts, with a similar number saying they might revise benefits to meet the extra costs of personal accounts.

The survey found more than eight out of ten DB schemes reported a deficit at their last funding valuation. However, two-thirds of employers have made special additional contributions to close the funding gap and responded to the Pension Regulator’s encouragement to generally reduce deficit recovery periods. Seven out of ten schemes expect to remove their deficit within 10 years.

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Jennifer Bollen
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E-mail: Jennifer.bollen@incisivemedia.com