Those lucky enough still to be in a final salary scheme will increasingly be offered sweeteners in an effort to entice them into surrendering their pension entitlements – and that's where the next big scandal may lie.
Research by PricewaterhouseCoopers (PwC) has revealed that a new wave of pension scheme closures is on the way as the cost of providing the pensions mounts. Most employers have already closed their final salary schemes to new members and the number of companies closing them to existing members has doubled in the past year, with another 30 per cent planning to close to new contributions soon.
The growing cost of providing final salary schemes means many firms are understandably desperate to get such obligations off their books – and this will accelerate as the costs of auto-enrolment, to begin in 2012, become clearer.
Fewer than 10 per cent of employers have already offered their staff enticements to transfer out of their final salary scheme, but that number will soar over the coming years. Indeed, PwC said a third of employers are considering trying to lure members into surrendering their right to future pension increases.
The Financial Services Authority has expressed concerns over the tactics employed by some firms to get members off their books – and it has every right to be worried. While companies are entitled to offer cash incentives or enhanced transfer values (or both) to transfer them out, there are widespread reports of underhand tactics by companies desperate to cut their liabilities.
For instance, where employers pay for members to get financial advice on transfers, some are paying double for each member that then transfers out. Some people have also taken cash incentives without being told that they may be liable for tax on the payment. For higher-rate taxpayers, the tax whack can make a considerable dent in the value of the inducement, and one that may cost them dearly in retirement.
More common is the accusation that firms are putting pressure on employees to decide quickly what they will do: buy-now-while-stocks-last, if you like. The problem for members under pressure to make decisions is exacerbated by the difficulty of comparing what is being given up with what is being offered – and those taking the specialist advice needed are in a minority, despite the implications for retirement.
The comparison calculations provided by firms are complex and usually stacked heavily in favour of the employer. The directors will typically have actuaries to advise them, and it's not being excessively cynical that they would not offer anything unless they were better off as a result, with the employee worse off.
This isn't a new phenomenon, but the PwC figures tell us that it will become increasingly commonplace. That it will be one of the biggest pension scandals of the coming years seems certain.
WHEN the coalition government pledged in its early days last month to compensate fully victims of the Equitable Life scandal, my instinctive reaction was that it should be taken with a pinch of salt. Sadly, it looks like there was good reason for cynicism.
To recap briefly, the UK government said it would set up an independent scheme in which non-means-tested redress would be paid to former and existing policyholders and the dependants of those who had died.
That would be a distinct improvement on the means-tested compensation lined up by the previous government. But with a cost that could reach 5 billion, it seemed inevitable that the government would find ways to cut the cost of the compensation. The Equitable Members Action Group now believes the Treasury is preparing to offer victims just 20p in the pound, cutting the compensation pay-out from an estimated 4.6bn to just 1bn.
Shocking as such backtracking would be, it promises to be a theme of the coming weeks as the faade presented by the new government gradually crumbles.