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UK stance on contracting-out 'spells end for DB schemes'

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  • UK stance on contracting-out 'spells end for DB schemes'

UK - Consultants have warned that the end of contracting-out for defined benefit (DB) pensions will spell the end of such schemes in the private sector.

Announced in the Budget by chancellor George Osborne - alongside reforms for the state pension that will see new recipients draw around £140 a week - the government will end the situation whereby employees paying into a workplace pension scheme do not pay full National Insurance contributions.

In the wake of the news, consultancies such as Aon Hewitt and PwC have warned that the increased cost resulting from the end of contracting-out will lead to the closure of the few remaining DB schemes, with KPMG noting it would otherwise increase the cost of the plans by 3.4% of employees' salaries.

Marc Hommel, pensions partner at PwC, said: "The end of this incentive will make up the minds of those few remaining employers to accelerate defined benefit closures."

Paul McGlone, principal consultant at Aon Hewitt agreed, saying those employers that had not yet closed their DB schemes had not done so because of the complexity of consultations involved with such a step.

"The danger with the proposal to abolish contracting-out is that, if companies are going to have to go through a painful consultation process anyway, then they may take the opportunity to simply close the scheme at the same time and use other arrangements to fulfil their forthcoming auto-enrolment obligations," he said.

Mike Smedley, pensions partner at KPMG, also raised concerns about fine print in the Budget concerning asset-backed structures and their use in addressing company pension deficits.

"At first glance," he said, "the wording suggests the government will prevent these structures in future, but our discussions with HMRC suggest something different.

"It appears there are concerns with structures that give more tax relief than the value passed to the pension scheme - for example, structures with contingent payments to the trustees or designed to generate a 'double dip' tax deduction."

Smedley added that these changes would seem to affect only transfers where the absolute value was not irrevocably passed on to the scheme.

However, Aon Hewitt's McGlone went on to say that while the proposals were easily understood "in principle", only small details had been agreed so far.

"The abolition of contracting out, the introduction of a £140 per year pension, the review of public sector pensions, the automatic increasing of state pension age, the integration of income tax and National Insurance - these are all easily understood in principle, but will be hugely complex to introduce in practice," he said.

The proposal to link state retirement ages to increasing longevity created "interesting angles" for employers, according to PwC's Hommel.

"It would be helpful if employers could share risk with their workers by being able to flex retirement ages according to changes in longevity," he said.

He added that while some employers had already agreed such measures, they currently involved a "huge amount of complexity" due to the time spent negotiating with both trustees and employee representatives.

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