Call for Pension Design Freedom

By Keren Holland, Global Pensions

August 28, 2008

United Kingdom

The government is being urged to encourage innovation in pension scheme design, following the release of its risk-sharing consultation.

The Association of Consulting Actuaries (ACA) was joined by Watson Wyatt in making the call, in a bid to slow the acceleration of closures in existing defined benefit (DB) schemes.

The DWP’s consultation paper asked whether the government should create a separate legislative framework for new types of pension scheme, such as ‘conditionally indexed’ defined benefit plans, where targeted pension increases were conditional on the funding level.

The ACA warned if risk sharing was not encouraged by legislative changes, most private sector employers would have little option but to continue with the present trend, forcing an increasing number of employees into defined contribution schemes. 

ACA chairman Keith Barton, said: "Given the scale of closures of quality private sector schemes, government cannot possibly say ‘there is no need to change the law' to encourage new risk sharing schemes. That worst case outcome, following on from the inadequate deregulatory reforms in this year's Pension Bill, would be, quite frankly, a disaster for future generations of pensioners who would be denied the opportunity to plan for a secure and predictable retirement income."

Barton said the ACA would continue to push for a ‘first step' risk sharing measure in the final stages of the Pensions Bill in October, or for legislation to be announced in this year's Queen's Speech on 3 December for implementation next year.

He said: “Any later timetable would simply be too late. This Bill would need to properly address the deregulation and encouragement of all forms of quality pension provision, before this is mostly lost from the private sector. If nothing significant is done, we doubt whether public sector pensions will be sustainable in their current form in the longer-term."

Watson Wyatt agreed employers who offered pensions that were more valuable than the minimum contributions to Personal Accounts should be free to design their own bespoke pension plans.

The consultants said they expected many employers to undertake wholesale reviews of their pension arrangements during the next few years. For some, this would happen when they closed their final salary plans to future accrual, while others would be prompted to reconsider their pension arrangements by the cost pressures arising from auto-enrolment. 

It said legislation permitting innovative plan designs needed to be on the statute book before these reviews got under way. 

Graham Finlay, senior consultant at Watson Wyatt, said: “Many employers are approaching a fork in the road when it comes to their pension arrangements. They are more likely to offer DB pensions in future if they can design pension plans which fit their own objectives. 

“There is some flexibility to do this under current legislation, but not enough. If the government believes it can encourage companies to maintain traditional final salary benefits by restricting their scope to offer alternatives, it should not be surprised if more private sector employers turn their backs on defined benefit pensions altogether.”

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