Backlash warning on DC plan illustration figures

UK – New government regulations that insist pension schemes must illustrate to members the amount of pension that might be payable at retirement have produced fears of a backlash against employers in their money purchase (defined contribution) plans.

The UK government’s Statutory Money Purchase Illustration (SMPI) regulation comes into effect April 6 whereby pension scheme managers or trustees must provide members who have a defined contribution scheme of the amount they are likely to receive at retirement based on current prices.

Human resources and employee benefits outsourcers, Black Mountain, points out that the SMPI statement will clearly reflect the impact of falling stock markets and rising annuity rates, which have slashed the expected value of employees’ pensions on retirement.

Says Black Mountain’s Lalji Patel: “SMPI will show that valuations have fallen way below earlier estimates, with some pensions at retirement likely to be as much as 60% lower than estimates made just a few years ago. This is likely to have serious implications for industrial relations and we’re expecting a backlash against employers.”

Companies which have closed final salary schemes in favour of defined contribution schemes may have “albeit unwittingly, misled their staff through over-optimistic estimates of the potential value of their pensions.” The SMPI statement will show clearly the impact of shifting the risk of poor investment performance from the employer to the member.

Says Patel: “These huge reductions in employees’ pensions are going to require some careful explaining. Many employers are totally unaware of the situation: they need to act now to implement an effective and structured employee communications programme before it is too late and they become embroiled in a major dispute with their employees.”

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