Pensions Bill reforms need a rethink

The government’s proposed reforms in the Pensions Bill, due to have its second reading on 7 January, do not go far enough, according to the Association of Consulting Actuaries (ACA)’s findings in its 2007 Review and Pension Trends Survey Report.

The ACA welcomed the government’s attempts to extend pension provision to a wider group of employees through personal accounts but said that there is still an urgent need to encourage employers to continue to offer workplace schemes that are better than personal accounts. It also wants the Pensions Bill to remove the ban on employers being able to offer conditionally indexed pension schemes, in which the level of pension would generally be geared to average career earnings. Deferred pensions and pensions in payment would be indexed, but with annual increases conditional on the health of a scheme’s finances. Conditionally indexed schemes offer the prospect of higher investment returns over the long term, and therefore lower costs, due to fewer constraints on investment strategy. 

The report also found that four-out-of-five defined benefit (DB) pension schemes run by companies responding to the survey are closed to new entrants (up from seven-out-of-10 three years ago). According to its figures, only around 900,000 private sector employees are now in DB schemes open to new employees, compared to more than 5 million public sector employees. 

Private sector employers and employees have contributed at record levels into DB schemes to eliminate scheme deficits and meet future benefit costs. However, the report also found that combined employer and employee contributions into defined contribution schemes have leveled-off at around a third of those into DB schemes.

Ian Farr, ACA chairman, said: “Most private sector defined benefit schemes are closed to new entrants and there is mounting evidence of closures affecting existing members. 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 the ‘middle way’ conditionally indexed pension schemes – a type of scheme that prospers in the Netherlands, stabilising there the retirement incomes of millions of people.”