UK – Pensions minister Andrew Smith’s new proposals today 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 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.

"We are concerned at the proposed increased burden to employers on wind up and fear that this could result in some employers deciding to close their schemes to future accrual," said ACA chairman Gordon Pollock.

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”. This idea is also in keeping with the Green Paper’s original intentions to create a partnership between employers, employees and trustees. These parties would consult with actuaries for advice on their specific funding requirements.

The proposal coincides with a draft published by the Institute of Actuaries today 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.

“The draft guidance anticipates the removal of the statutory MFR by providing an objective framework for actuaries to give scheme-specific funding advice to trustees,” says Ronnie Bowie, chairman of the pensions board of the Actuarial Profession.

As trailed in newspaper reports this week, Smith also announced the intention to reduce the compulsory indexation introduced in 1997. Currently funds must make provisions for inflation or five percent - 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 155 million pounds.

The National Association of Pension Funds described the proposals as “a useful step towards boosting fragile public confidence in pensions.” ‘It is good news,” said a spokesman, but added that the proposals are of little help to those to don’t have access to a scheme. “We need to incentivise employers to offer schemes.”

The Pensions Management Institute, whilst welcoming some of the measures such as trustee training and employee financial education that we welcome, said that there seems little to address the current problems faced by defined benefit schemes, and the pressures on employers to cease such provision.

Whilst the PMI does not promote either defined benefit or defined contribution schemes as being intrinsically superior to the other, it says “we do not believe that the government's proposals contribute to a levelling of the playing field”.

Today’s proposals follow an extensive consultation period that proceeded the Government’s Green Paper on pensions reform proposals last December. Said Smith today: “I’ve taken a hard look at all the proposals and struck a balance between reducing costs on schemes while also providing new protection for people who work hard to build up pension rights. All partners must now rise to the challenge and work together to build pension provision in the UK.”