Consultant claims 'good' employers face active discrimination
UK - The UK government is "actively discriminating" against 'good' employers who are providing defined benefit schemes, while failing to establish protection for the defined contribution schemes it actively encourages, Barnett Waddingham has warned.
Adrian Waddingham, senior partner at Barnett Waddingham, claimed "every member of a DC scheme has lost lots of pension from their scheme over the past 10 years or so".
He noted a man saving £200 a month until the age of 65, would in 1996 have received a pension fund valued at £287,413 (€314,113), and an annual pension of approximately £22,706.
However, 10 years later in 2006 a man with the same level of contributions would only receive a total fund of £121,452, and an annual income of £4,964, partly because of lower investment returns and partly because annuity rates have almost halved from
79.14 in 1996 to 41.2 a decade later.
Waddingham argued: "The government will only encourage DC schemes yet there is no protection for them. More people have lost more pension in DC than DB as a result of poor investments and the rocketing cost of annuities."
The actuarial consultancy pointed out the "crisis" in the DC sector has tended to be overlooked, as the focus has been on the decline of DB schemes, as recent research by the Association of Consulting Actuaries (ACA) revealed the number of private sector DB members has dropped from five million in 1995 to around 900,000 in November 2007.
However, it suggested DB schemes may start to be reinvented, a trend which has already started in the US, as a solution to genuine business needs, such as providing incentives for older members of staff to retire to allow new 'talent' to replace them.
That said, he pointed out the ongoing pension reforms indicate future employees will only be given the option of a "cheap and cheerful" DC scheme, as the "super-duper" DB schemes are declining and there is no "middle ground" as there is " a government ban on promising pensions unless they've got bells and whistles".
He claimed there can only be good pensions or guaranteed pensions "you can't have both", and suggested the government is "actively discriminating" against good employers, through increase regulation and lower contracting-out rebates, which are "acting as a disincentive".
"Furthermore the contracting-out rebates are now lower than the funding level that would be acceptable to The Pension Regulator (TPR) under the "scheme specific funding requirements"," said Waddingham.
"Contracting out is now acting as a disincentive for running good schemes. This is perverse. But the minute a scheme withdraws from contracting out, it would lead to a major benefit redesign, which would probably end the scheme. The government is actively discriminating against good employers," he added.
As a result, Waddingham is calling for the government to rethink its stance on conditional indexation, after amendments to the current Pensions Bill removing the ban were rejected during the Committee stage last month. (See earlier IPE story: UK to consult on conditional indexation ban)
He said: "DB schemes can only really work if there are these safety valves. We can have good pensions or we can have guaranteed pensions. We can't have both. No other country forces revaluation before and after retirement, so it is not clear why these hybrid schemes, that are clearly better than the coming personal accounts, are banned by law. The current Pensions Bill refuses to address this."
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