Gov't told employers 'need to be pressured into risk sharing'
UK - A risk-sharing approach to pension provision, such as conditional indexation, would only be adopted by employers if faced with regulation or pressure from competitors, according to BMRB Social Research.
The report, commissioned by the Department for Work and Pensions (DWP) and entitled Employer attitudes to risk sharing in pension schemes: a qualitative study, suggested few employers saw any advantage in adopting a risk-sharing approach to pensions.
Findings indicated employers with partially open or closed defined benefit (DB) schemes felt risk sharing would introduce "additional unpredictability" in funding costs and impose an additional administrative burden and cost.
Providers of open DB schemes meanwhie said they wanted to maintain their existing scheme partly for paternalistic reasons and partly because it is appropriate to their industry sector, as it is understood closing the DB scheme could directly affect the ability to attract and retain staff.
Operators of defined contribution (DC) schemes also claimed adopting a risk-sharing approach - either through conditional indexation or a collective DC scheme - would be a "backwards step" in terms of financial liability, as well as an increased administrative burden.
The survey of 30 employers also suggested the complexity of the risk-sharing approach would be too complex to explain to employees and the overall view was it would be "unlikely to stop the declining membership of pension schemes".
As a result, the research revealed, employers would change their current approach following some form of "external pressure", either through compulsion by the government, or if their competitors offer risk-sharing propositions and employers could demonstrate it was affecting their ability to recruit or retain staff.
According to one employer operating a partially open DB scheme with more than 1,000 employees, "those arguments would have to be strongly compelling to push us down that route" and claimed the proposals to share risk "don't really have a hope".
The research was published by the DWP as the government consultation on risk-sharing closed to submissions, and amid reports suggesting changes may not be included in the current Pensions Bill, scheduled for its next reading in October. (See earlier IPE article: Gov't paper may lead to risk-sharing in 2009)
The Association of Consulting Actuaries (ACA) said in its consultation response the government "must stop micro-managing workplace pension designs provided they meet minimum regulatory standards".
ACA claimed there is "an urgent need" to allow employers to offer risk-sharing schemes when reviewing existing pension arrangements ahead of the introduction of personal accounts and auto-enrolment in 2012.
Its response called for new forms of risk sharing and for new scheme designs to be encouraged by legislation, provided these can be clearly and simply explained to scheme members and meet appropriate minimum regulatory standards.
Keith Barton, chairman of the ACA, said: "We are still pressing the case for a ‘first step' risk-sharing measure in the final stages of the Pensions Bill in October. The ACA conditional indexation model is the most well-advanced of the new model designs in the consultation paper and is ready to run. It is a risk-sharing option we have worked on for over two years and has a proven track record in The Netherlands."
Alternatively, Barton suggested if legislation were to implemented next year it would need to be announced in the Queen's Speech in December this year, as any later timetable "would simply be too late".
He added: "if nothing significant is done, we doubt whether public sector pensions will be sustainable in their current form in the longer-term".
Consulting firm Watson Wyatt agreed "legislation permitting innovative plan designs" must be on the statute books before the "wholesale reviews" of pension arrangements, expected over the next few years, gets underway.
Graham Finlay, a senior consultant at Watson Wyatt, said: "Many employers are approaching a fork in the road when it comes to their pension arrangements. They are more likely to offer DB pensions in future if they can design pension plans which fit their own objectives."
But Watson Wyatt warned the most significant objections to DB provision varies from employer to employer, and may not be addressed by simply approving the models outlined in the consultation paper, and instead suggested wider deregulation through a "general presumption that pension plans meeting minimum standards will be legal".
Finlay said: "It is unrealistic to believe that governments can ‘pick winners'. As long as pensions for future service are more valuable than the minimum contributions to personal accounts, why not let employers design them how they wish?"
Helen Ball, partner at law firm Sacker & Partners, also said the firm supports the policy of risk sharing but its submission questions the "appetite for further change, given the current tough economic climate".
She said: "Employers which have already implemented significant legislative changes to their company pension schemes may be reluctant to spend additional time and money to make any further alterations."
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