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UK employees "losing faith over pensions"

UK – British employees are losing faith in the ability of their employers to help them with their pensions, says a report from Aon Consulting.

The survey, conducted in August, collated responses from 1,500 individuals across the UK, of which 40% said they do not believe that their company pensions schemes and state pensions will provide for an adequate retirement.

Yet 71% of the respondents said that their employers’ contributions to occupational pension plans are very important or critical.

The publication of the report coincides with comments by Digby Jones, the director general of the Confederation of British Industry, in the Times newspaper. Jones’ remarks indicate that the organisation may be softening its stance on compulsory employer contributions. The CBI has always made clear that it is against compulsion, but a spokesman for the organisation confirmed that Jones had admitted to The Times that, while it remains opposed, “it will consider proposals”.

Also, this week, Alexander Forbes Financial Services, estimated the cost to companies of keeping a defined benefit scheme open result in an increase of contributions from 11% of payroll to 23% - even if the scheme is closed to new employees. “We believe that for many employers struggling in this tough economic climate the DB scheme represents an unacceptable drain on company profits.”

The UK's main union body, the Trades Union Congress said it has analysed tax department data and found that in the five years to 2002, employers with final salary schemes “clawed back some 1.1 billion pounds” by reducing or stopping their contributions.

Meanwhile, a new academic study has found that a defined benefit pension system maximises social welfare more than a defined contribution one.

“Our results indicate that positive levels of DB social security systems can be welfare enhancing but this does not turn out to be the case for DC systems,” said researchers Francisco Gomes and Alexander Michaelides.

“We find that the insurance provided by a DB system can outweigh the efficiency cost from higher taxes to finance the DB payments,” they added. “As a result, social welfare is maximised at positive DB provision levels.”

The comments come in a 51-page study published by the Center for Retirement Research at Boston College entitled “Aggregate Implications of Defined Benefit and Defined Contribution Systems”. Gomes is a professor at the London Business School and Michaelides is a lecturer at the London School of Economics.

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