Flat-rate state pension may cause DB rethink

Last month the government set out proposals to reform the state pension, including the introduction of a flat-rate pension of £144 a week (in today’s money) for future retirees from 2017.

Plans also include the abolition of contracting out, which would mean a rise in national insurance contributions (NICs) for employers and employees with defined benefit (DB) pension schemes.

Malcolm McLean, consultant at Barnett Waddingham, said: “Many private sector employers are expected to want to claw back the extra money they have to find by raising employee [pension] contributions or reducing benefits.”

The proposals include a provision that would enable employers to reduce pension benefits without a member’s consultation and override scheme rules.

Some advisers say the cost of higher NICs may lead some employers to consider closing their DB schemes. Charles Cowling, managing director at JLT Pension Capital Strategies, said: “Those still offering DB schemes will take a long look at them and may use this as an excuse to move to a DC [defined contribution] scheme instead.”

The introduction of a flat-rate state pension could cause a change in the financial education offered to employees. Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “In DC schemes, for younger employees looking ahead, the deal is going to be more straightforward.

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“They will know how much they will get from the government in today’s money. So, for most DC schemes, there will have to be a rewrite of how to communicate with members and help them to manage their benefits. Talk about contributions and funding and how the private scheme will interact with the new state regime.”