potential cost and impact on firms offering DB schemes a concern for providers
Government plans for an insurance fund to protect final salary pension scheme members are likely to prompt many employers to exit defined benefit arrangements.
That is the view of Tower Perrin, Clerical Medical and Scottish Equitable, after Andrew Smith, secretary of state for work and pensions, outlined the Government's response to consultation on its December 2002 pensions green paper last week.
The pensions protection fund will guarantee members of defined benefit pension schemes receive at least 90% of their accrued pension rights when a company goes bust. A full buy-out clause will also be introduced, ensuring solvent companies winding up schemes fully buy out members' benefits, Smith said.
The bulk of the criticism has centred on the cost of such protection, where the funding is coming from and the impact it will have on companies currently offering defined benefit schemes.
Mike Hammer, senior consultant at Towers Perrin, said: 'The government is making employers finance this security and in many places it will be an onerous burden. We believe this will give employers added incentive to switch employees to defined contribution plans.'
Nigel Stammers, head of industry affairs at Clerical Medical, said the pensions industry has previously had little enthusiasm for this type of central discontinuance fund, as the cost would fall on employers and potentially drive more companies away from offering defined benefit schemes.
He also pointed to the moral hazards experienced by the US version of this type of insurance, the Pension Benefit Guarantee Corporation. Although the 90% cap is designed to mitigate this, companies with less well-funded schemes could come to rely on the protection rather than increase funding, as has occurred in the US.
Scottish Equitable has similar concerns. A group response to the proposals expressed disappointment the government will not underwrite the pension protection fund and warned with several major FTSE 100 companies' pension schemes on the brink of insolvency, the industry could see one crash before the measures are implemented.
The Consumers' Association has been particularly vocal in its criticism of the proposals. Director Sheila McKechnie said the measures only cover occupational schemes and side-step the wider problem of people not saving enough to fund their retirement.
She added: 'The Government has completely bottled out of facing up to problems in the private pensions sector, which it is expecting current generations to rely on to fund their retirement.'
The Government's proposals also focused on the introduction of a new pensions regulator with a mandate to lighten the regulatory burden and actively target schemes that are badly run and high risk from a consumer standpoint.
Smith also proposed the priority order, which governs how individual employees' claims are ranked when distributing the proceeds of an insolvent scheme, be amended to try to enforce a more equitable distribution of assets reflecting employee's length of service.
Employees close to retirement with longer service records will receive greater payouts than their younger counterparts with shorter service, reflecting the fact the younger workers have time to rebuild their pension pots.
'I want to end the scandal of workers being denied the pensions they have built up over many years or pensioners seeing their pensions cut if their firm goes bust and their scheme winds up,' he said.
Smith also stressed the importance of streamlining regulation to reduce costs and said the proposed changes should save business up to £155m in total. Scheme funding requirements are to be overhauled, shifting away from MFR to a more scheme-specific method. Changes to the contracting-out regime will be consulted on.
Compulsory indexation, introduced in 1997, will also be relaxed as a reaction to declining rates of inflation and cut from a minimum 5% to 2.5%.
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