UK guarantee proposed
UK pensions minister Andrew Smith’s new proposals to protect members of pension schemes have received a mixed response from the pensions community.
The proposals include a pension protection fund, fairer distribution of assets if a scheme is wound up and a replacement for the Minimum Funding Requirement.
Alan Pickering, chairman of the European Federation of Retirement Provision and a partner at consultants Watson Wyatt, was positive: “Given the government couldn’t start with a blank sheet, and the legacy problems of the pensions system, I think today’s proposals are as bold as one could have hoped for.”
The first proposal is for a pensions protection fund, similar to that of the US Pension Benefit Guaranty Corp. This would essentially mean insurance premiums being paid by employers to ensure “that where company pensions have been promised, pensions will be delivered”.
It is hoped that those companies with higher funding levels will pay lower premiums. The Confederation of British Industries, which represents employers, welcomed the proposals. But the CBI added: “Insurance could be one solution but the cost of providing occupational schemes has shot up hugely and anything that added to that could be extremely damaging.”
The government also intends to immediately change the priority order so that remaining assets of a scheme in a wind-up are distributed fairly among the workforce, reflecting the length of service of employees. This measure is regarded as long overdue, but its immediate introduction is regarded as positive.
Says Pickering: “It is a very welcome move that it is being introduced as soon as possible rather than waiting for it to become legal as planned in 2007.”
The Association of Consulting Actuaries said it “welcomed the intent” of the proposals but said it was concerned that the net impact may be to increase the rapid move away from defined benefit arrangements.
A new scheme-specific funding requirement is being proposed to replace the Minimum Funding Requirement, or MFR. The idea will be to allow scheme parties to be able to have greater control of the design of a fund and its financing, resulting in greater flexibility and freedom.
There are of course risks involved if schemes are given free rein, but Pickering believes the “positive benefits of freedom far outweigh the negatives”. The proposal coincided with a draft published by the Institute of Actuaries proposing changes in methodology when calculating a scheme’s financial position.
The new guidance will require actuaries to disclose in a report to trustees whether the assets of the scheme are sufficient to meet the cost of buying all of its retired workers, current staff and deferred fund members an annuity if the firm should go into administration.
Smith also announced the intention to reduce the compulsory indexation introduced in 1997. Currently funds must make provisions for inflation or 5% – whichever is the lower, but since its inception inflation has fallen and this level has proved far more expensive to sponsors than had been expected. This is now proposed to be lowered to 2.5%.
Pickering himself advocated the removal of inflation-proofing in his government-commissioned report into the simplification of the regulation of private pensions. One argument being that it was driving employers to switch from defined benefit to defined contribution schemes.
The unions will be unhappy with the proposal, however. Roger Lyons, general secretary of the manufacturing union, Amicus, called the proposals “unacceptable” earlier this week. “Individuals could end up destitute after a number of years as pensions lag well behind inflation rises,” said Lyons.
Smith claims that today’s proposals could save businesses up to £155m (E225m).