UK - Rules allowing members of occupational defined contribution (DC) schemes to take benefits of less than £2,000 (€2,245) regardless of other pension savings should be extended to contract-based DC schemes, according to the Association of British Insurers (ABI).
In a Retirement Income Policy Paper outlining seven proposals to improve DC pension benefits, the ABI argued that standardising trivial commutation limits between occupational and contract DC schemes is needed to remove the “unfair disadvantage” to members of contract-based schemes.
Under existing legislation, savers in these schemes are not eligible for the £2,000 ‘disregard’ so if they miscalculate the total value of pension savings, or have a fund too small to annuitise they can be left with “stranded pots” of money they cannot access.
The ABI also claimed that the planned introduction of auto-enrolment into workplace schemes from 2012 is “likely to further increase the number of people unable to access their DC pension savings in this way”, particularly for an employee who has retired and already taken DC pension benefits but then returns to work and builds up new pension entitlements.
It argued: “The current triviality rules need to be changed to ensure modest earners with small funds or ‘stranded pots’ are no longer denied access to their savings as an unintended consequence of the existing triviality rules. The government should work with pension providers to address this situation, and remove what is otherwise likely to become an increasing problem for retirees.”
Other proposals included in the paper call for the age limit at which an annuity must be bought to be raised from 75 to 80 and allow savers with small pension funds to amalgamate them with a spouse or partners savings to purchase a joint life annuity.
Maggie Craig, acting director general of the ABI, said: “The UK pensions landscape is undergoing huge change, with the numbers drawing benefits from DC pensions savings in 2010 set to exceed 500,000. The good news is these people can expect to live longer. However, this improvement brings new pressures, which means the current rules and regulations are not fit for purpose.”
Elsewhere, the final results of the Association of Consulting Actuaries’ (ACA) 2009 pension trends survey suggested 59% of employers plan to review pension arrangements ahead of 2012, while 24% of those questioned said they expect to reduce benefits in response to auto-enrolment.
The findings suggested 87% of defined benefit (DB) schemes are closed to new entrants, with 91% of DB schemes in deficit and with an average funding level of 79%. However, over half of all the DC schemes surveyed report employer contributions of less than 6% of earnings and less than 4% from employees, leading ACA to suggest that pension outcomes “are likely to worsen significantly in coming years”.
Keith Barton, chairman of ACA, said: “Public policy seems to be locked into justifying ever heavier regulation and cost under the banner of protecting accrued benefits for generally older employees, but with scant regard for the future pension security of millions of younger private sector employees.”
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