Jeff Salway: Professionals rekindle pensions debate as campaigning begins

ANYONE deluded by New Year optimism into believing that 2010 will serve up some fresh themes in the turbulent world of pensions has been given an early blast of reality.

Monday saw the publication of two reports offering a stark reminder of the challenges facing the government, employers and financial services industry in the months ahead.

First up was the Association of Consulting Actuaries (ACA), with the latest snapshot of the UK's fast disappearing final-salary pensions provision. The ACA didn't tell us much we don't already know – that the days of final-salary pensions in the private sector are numbered. But it did offer further evidence that the final reckoning could come sooner than many anticipated. Almost nine in ten firms offering final salary schemes have now closed them to new entrants and one in five have also closed to future accrual, double the number just four years ago.

With most employers still offering final-salary pensions reviewing their stance, such pensions will be all but obsolete by the end of this decade. That does not have to be a bad thing, provided employers and employees make the best of defined contribution (DC) schemes, into which most private-sector workers now save. However the ACA also revealed that contributions to DC schemes – which are based on contributions and investment performance – remain low, with more than half employees contributing less than 6 per cent of earnings. Employees typically contribute less than 4 per cent of earnings in more than half of all DC schemes.

Combined with recent poor investment performance and increased longevity, these figures spell disaster, as it's safe to assume that non-pension savings are not sufficient to compensate.

The new name for the government's personal accounts initiative is to be revealed today, but the ACA pointed out that this is (rightly) focused on low-income earners. It is calling for a new pensions commission, which would look at helping companies offer a wider range of secure and affordable pensions. With the ACA's survey showing a sharp rise in the past two years in the number of firms who believe the government's policy of supporting quality is failing, renewed focus is needed on protecting and promoting attractive workplace pensions.

The Association of British Insurers (ABI) threw its tuppence worth in too. On Monday it published proposals it believes would improve the flexibility enjoyed by people taking retirement income from defined contribution pensions. Its paper, previously scheduled for a pre-Christmas publication, was aimed at policymakers, most notably the Tories. The headline proposal was to raise the age requirement for buying an annuity from 75 to 80. The Tories have said they want to do away with the requirement altogether, so the ABI's suggestion has supplied a convenient compromise should they seize power.

The proposal makes complete sense anyway, as the current laws are in need of updating. About 90 per cent of 65-year-old men and 94 per cent of 65-year-old women live to at least 75, and the trend towards working beyond the traditional retirement age is accelerating, partly out of necessity.

The ABI is on fairly safe ground with its other proposals, bar one that sticks out a mile. It suggests allowing married couples and civil partners to merge their pensions – something HM Revenue & Customs would never countenance, given the implications for individual allowances and tax reliefs, to name just two sticking points.

The ABI did not address the open market option (OMO, which allows retirees to shop around for their annuity). But while it seemingly remains reluctant to make the OMO the default option when people come to convert their pension into a retirement income, it is justified in wanting more time to evaluate the impact of its recent work in encouraging insurers to improve their at-retirement communication with members.

So the big steps needed to ensure that more people get a good deal in retirement are not likely to be taken this year. Yet the ABI – seemingly more proactive under acting director-general Maggie Craig, the group's director of Scottish affairs – has made an encouraging start to 2010 with a spirited contribution to the pensions policy debate.