Employers seek new laws on pensions flexibility

Published on Monday 31 August 2009 21:17

EMPLOYERS are urging the government to introduce laws that will ease the pensions burden on company balance sheets and improve security for employees.

A survey today shows that a significant number of companies want legislation to give them more flexibility in providing pensions. According to a powerful body of experts, a relaxation of the rules would make it easier for companies to provide a range of options that are less costly for them than final-salary schemes and less risky for staff than money purchase, or defined contribution (DC) schemes.

The Association of Consulting Actuaries (ACA) found that 76 per cent of the 300 employers questioned in a survey want change.

Employers said their options are limited by legislation. As a result, most companies offer expensive final salary schemes, also known as defined benefit (DB) schemes, or more volatile, but cheaper, DC schemes.

Under final-salary schemes, the employer states exactly how much a pension will be worth on retirement. But in the face of increasing financial pressure, the trend is for companies to offer DC rather than final-salary schemes. Employers guarantee how much they will contribute to the pension, leaving the individual to shoulder the risk of stock market uncertainty.

The need for alternatives is highlighted by ACA's report on pension trends. It has revealed that 87 per cent of final-salary schemes are closed to new entrants. More than a fifth of employers said they are considering a move from DB to DC schemes.

The survey also revealed that nine out of ten final-salary schemes are in deficit.

A number of firms have announced plans recently to close final-salary schemes, including Barclays. Others, including Royal Bank of Scotland, which has an 800 million deficit in its scheme, intend to cap benefits payable to members.

Despite a growth in the number of DC schemes, 76 per cent of employers said they felt their staff were uncomfortable with taking on inherent inflation and investment risks. The ACA survey found that 77 per cent of employers said that current legislation does not allow them to easily share risk with their staff.

It is calling on the government to take action to allow "middle way" pensions to be introduced. It said employers want to be able to keep costs down, while providing pensions that give staff more certainty.

Keith Barton, ACA chairman, said: "This survey confirms all our worst fears about the loss of quality pension schemes. If we are to preserve as much private-sector defined benefit provision as possible, the government must act during 2010 to free up pension designs."

A spokesman for the Department for Work and Pensions admitted that these are challenging times for firms offering DB schemes.

He said: "We have tried to ease the financial burden through freezing the administration levies, which fund the running costs of the regulator and the Pension Protection Fund. We continue to talk to the industry about what more can be done."