UK - An increase in “well-meaning” legislation has effectively ‘killed off’ defined benefit (DB) schemes through rising complexity and costs, experts have warned.

At a Reform debate last week on ‘Retirement is dead: long live retirement’, the panel of speakers suggested the decision to make indexation of pensions compulsory and increase regulation around the operation of DB schemes had contributed to their demise.

A question from the audience asking the speakers whether legislation had ‘effectively killed off’ DB plans follows recent research from the National Association of Pension Funds (NAPF) suggesting more than 50% of open DB schemes were considering switching to a DC or hybrid scheme. (See earlier IPE article: 1,000 open DB plans could switch to DC).

In response to the question, Nigel Waterson MP, shadow minister for pensions for the Conservative Party, told attendees the answer was yes, and said the Pension Protection Fund (PPF) was believed to be heading for a £1bn deficit as a result of recent insolvency cases, as the only three solutions are to increase the levy on surviving schemes, reduce pension benefits or have the government stand behind it. 

He argued in it has “become more complicated and time consuming and expensive” to run a DB schemes in the last 10 years, which is why the Conservative Party is “pressing hard” to do more to relax regulation, following the government deregulation review in 2007.

John Lawson, head of pensions policy at Standard Life, also added one of the main costs for employers is pension indexation, introduced in 1997, as this “costs 60% more than a level pension”.

He said this regulation turned pension promises into guarantees, as previously employers only increased pensions if there was “enough money left in the pot”.

However, Lawson pointed out another internal problem for DB schemes is the failure to increase the normal retirement age for members, as although “some odd ones have done so recently, but it’s too little too late”.

He agreed DB schemes might be made more manageable but warned: “Ultimately, the government might have to do something. [DB schemes have] got an enormous deficit at the moment, around £250m, and that’s enough to break some corporates.

“There are some tough questions for DB schemes over the next 10 years,” added Lawson, as he suggested the existing 10-year recovery period is too short, while the accounting rules of FRS17 and IAS19 means while liabilities look smaller at the moment because of higher bond yields “in the real world these things are in enormous deficit and the accounts will recognise that at some point”.

During the debate, which also saw the launch of research by Standard Life into retirement attitudes of ‘baby boomers’, Lawson and Waterson both suggested there was cause for optimism in pension saving despite the economic crisis.

Waterson said: “Superficially, it is very bad news for pension saving as there is even more pressure on DB schemes, there will be a fear and distrust of financial institutions and the government and personal accounts could bring about levelling down.

However he claimed “savings will increase”, as people start to exercise ‘thrift’, while the economic situation would result in a “righting of the imbalances in the asset mix weighted towards property as retirement income”.

Meanwhile, Lawson claimed “savings start to recover during a recession”, as he pointed out the last peak in the savings ratio - of around 11% compared to 0.4% last year - was in the early 1990s.

He suggested “savings will pick up regardless of these tough economic times”, and despite the recent cuts in interest rates, including a further 0.5% drop by the Bank of England on 6 February, “the tendency will be to save” although he suggested bank accounts would probably be the main beneficiary rather than pension funds.

Waterson added: “Despite all the doom and gloom there are huge opportunities for pension savings and savings in general.”

Research from Standard Life revealed over half of 46-65 year olds plan to travel more in their long term future, rising to 66% among the wealthier workers.

Figures also showed a third of this age group, and of those from wealthy backgrounds, hope to learn a new skill such as a new hobby or language, while over 50% want to spend more time with the people most important to them.

The survey of 2,000 adults aged 46-65 also showed almost 40% want to continue work after retirement, while 5% plan to start a new business venture once they retire.

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