Personal accounts could lead to "pensions apartheid" as entry into good existing occupational schemes is restricted by employers following the introduction of auto-enrolment, claims the Association of Consulting Actuaries.
The first report in ACA’s ‘2007 Pension Trends Survey’ reveals while 59% of employers believe the State pension reforms currently passing through Parliament will provide a better platform on which to build private pension provision, there are doubts about both personal accounts and policy on occupational pension schemes.
The survey of 336 employers - representing scheme assets of £127bn and more than 2.1 million members – reveals 68% expect personal accounts to lead to levelling-down of employer pension contributions.
In addition, 76% of respondents believe the private sector reforms, scheduled for 2012, will lead to an increase in the number of closures of good workplace schemes as employers rationalise their expenses going forward.
ACA says the survey suggests“pensions apartheid” may develop between those in existing schemes and those in personal accounts, as 31% of employers say they are likely to restrict entry into their occupational schemes, a figure which rises to 42% among smaller firms.
The findings also reveal 36% of smaller firms – those with up to 250 employees – say auto-enrolment will cause them to abandon their existing scheme in favour of personal accounts, while another 36% are likely to reduce the benefits they offer in order to offset the costs of paying contributions to more people.
On the occupational reforms currently proposed by the Government, 80% support the idea of allowing employers to increase retirement ages for future benefits, although only 29% support the same proposal for past benefits.
In addition, 59% of employers like the idea of being allowed to recover some of the surplus if the funding level exceeds the target set by trustees, while 54% oppose the intention to remove the mandatory indexation of pensions in payment.
Findings from the research also suggest opt-out rates from personal accounts could be higher than expected, with larger firms estimating 20-25% of employees will reject the new system, which increases to 30-40% in smaller firms.
The survey also reveals 72% of employers support the idea of risk-sharing schemes, as proposed by ACA, although the organisation notes current legislation restricts the development of this type of system.
Ian Farr, chairman of ACA, says the survey results underscore the dangers of the law of unintended consequences, as all too often over the last 20 years, well-intended legislation has led to damaging consequences for good existing pension provision.
He says: “While the idea behind personal accounts is laudable – extending pension coverage to more employees – it is clear form these findings that many may lose out unless great care is taken.”
He suggests regulatory easing and real positive support for ‘good’ existing and new workplace arrangements is a vital element of reform which must be effective ahead of 2012 when personal accounts are set to be introduced.
Farr says: “A radical agenda of reform from the Deregulatory review currently underway is vital. We await the results with great interest.”
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