Promote good pensions now

URGENT action is required to prevent a major shock for employees relying on state and private pensions to fund their retirement. This is why whoever wins the next election should put pensions high up their agenda to avoid prospects deteriorating sharply over the next few years.

Firstly, in 2010, the government – old or new – must do much more to back employers who are prepared to offer quality pension schemes in the private sector, if they want these to continue.

The organisation I chair, the Association of Consulting Actuaries (ACA), conducted a major survey of workplace pension trends which revealed a growing disillusionment among employers.

Just 6 per cent of employers are happy with the government's record in this important policy area, down from 38 per cent two years ago, our research disclosed.

Given this climate, it is unsurprising that as each week goes by we hear of more closures of long-standing, good employer-sponsored schemes, often making way for lower-cost or more lightly regulated arrangements. The rising cost and risks involved with many of these existing schemes that are being closed cannot be overlooked, but just as important is the loss of confidence among employers that the government is presently prepared to take the action necessary to genuinely promote quality pensions.

Government actions designed to protect existing scheme members' pensions are important, but these do nothing to make sure quality schemes remain open to existing and new employees.

But there could be worse to come. The ACA survey also found that as we run up towards 2012, when the government's low-cost Personal Accounts are due to be launched, 15 per cent of employers of all sizes will consider closing their existing pension schemes in favour of offering just Personal Accounts to all employees.

A further 24 per cent are likely to revise existing pension benefits to mitigate the costs if, instead, they auto-enrol all employees into an existing better scheme. This duty to auto-enrol all employees into a qualifying workplace pension scheme or Personal Accounts will begin in 2012 with larger employers and then move on to smaller businesses over the next few years, including those with just one employee.

While the ACA strongly supports the extension of pension coverage to more employees – at present more than half the workforce do not have access to such schemes – we are concerned that not enough has been done to help quality schemes: those where existing pension contributions far exceed the minimum required into Personal Accounts and where the pension outcome is likely to be significantly better for members.

On state pensions, while all political parties seem committed to linking the basic state pension to earnings growth within the next five years or so, it already seems likely that increases in state pension age due over the next 50 years will prove insufficient to meet rising longevity.

The incoming government, whoever that might be, should take a second look at the timescale for increasing state pension age and face the need for accelerating the changes. Inevitably, this will drive adjustments to both private and public sector pension schemes. The reality is that good pensions can only be afforded by the state and private employers if we recognise that advances in longevity lead to longer working lives and later retirement.

To address the need for changes in retirement ages and to keep state, public and private pensions responsive to economic, regulatory and demographic changes, we believe there is a need for a standing Pensions Commission, charged with making recommendations to government on a periodic basis.

A key mission of this body would be to promote good pension provision – a step well beyond simply protecting the pensions of existing pension scheme members. We will be calling on the political parties to make such a commitment in their respective manifestos ahead of this year's general election.

On private pensions, for the last five years or so we, and others, have called for legislative changes that would allow employers the option to offer a wider choice of "middle way" quality pensions.

These options would include the ability to deal with increasing longevity, as well as providing funding respite in difficult financial markets. They would still protect members against the consequences of employer failure, and would provide greater certainty of benefits for members compared with defined contribution schemes, where volatility in outcomes remains a real problem, particularly for those on lower incomes.

New "middle way" schemes would offer greater certainty of costs for employers than current defined benefit schemes, the vast majority of which are now closed to new and, increasingly, existing employees. And, importantly, they would recognise the efficiencies in collective schemes that can add a huge amount to pension outcomes as compared to individual defined contribution contracts.

There is a need to act well ahead of 2012. We cannot see how the 2012 reforms can go ahead on time – even allowing for the recently announced partial postponements – unless employers have wider, more flexible, quality pension options available ahead of this. This is a top priority for pension policy to avoid the very real danger of levelling down.

Keith Barton is chairman of the Association of Consulting Actuaries