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Contributions to DC plans worryingly low, says ACA

UK – Low contribution levels from employers and employees alike into the defined contribution (DC) pension schemes of smaller companies will spell misery for pensioners in years to come, says a survey conducted by the Association of Consulting Actuaries (ACA).

The survey, based on responses from 418 firms employing 250 or fewer people, shows that combined employer and employee contributions average out below 9% of earnings, which is some 5-7% below contribution levels into defined benefit (DB) schemes.

Says Mike Arnold, chairman of the ACA : “Smaller companies represent a hugely important sector of the economy, generating half our business turnover. How they are approaching pensions has a big impact on the retirement incomes for millions of people. We are therefore very worried about levels of contributions into many schemes.”

ACA’s research suggest that the problem will be further exacerbated by other factors, including :
•pension taxes such as the abolition of ACT credits
•lower investment returns, albeit net of inflation
•improving life expectancy
•the trend towards early retirement

The survey also finds that nearly half those smaller companies with an existing occupational scheme, alongside more than two thirds of those without, will not make any contributions to the new stakeholder pension schemes that they may be required to set up. ACA suggests that this is “gloomy news” for people with no other pension arrangements and is leading to a situation where stakeholder will only be beneficial for those on higher income levels.

Moreover, according to ACA’s survey, if smaller companies without an occupational scheme are forced to make contributions to stakeholder schemes by future legislation, they will have to cut costs in other parts of their business.

Elsewhere, the report finds that nearly two thirds of firms with DB schemes report that their pension costs, both in terms of contributions and administration, have risen faster than other liabilities, due primarily to increased compliance costs and changes to ACT in 1997.

Furthermore, reduced equity returns, coupled with the impact of both the minimum funding requirement (MFR) and the introduction of FRS 17, the new pensions accounting standard, are adding to the problem, says ACA.

“Meaningful reforms reducing cost and regulatory pressure on firms are needed now. We would welcome urgent talks with the government about removing the major burden on UK pension schemes that the MFR has become, while safeguarding members’ security,” Arnold comments.

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