Press Release

ACA calls for Pensions Bill changes to stem decline in good occupational pensions

2 January 2008

With the Pensions Bill set for its Second Reading on 7 January, the ACA’s Review and Report on their 2007 Pension trends survey highlights the urgent need for additional reform measures to be included in the Bill if private sector employees are not to lose out…

The final report of a survey on pension trends1 in companies of all sizes, published today (2 January 2008), has confirmed 4 out of 5 defined benefit pension schemes run by companies responding to the survey are closed to new entrants (up from 7 out of 10 three years ago). Latest figures collected by the Association of Consulting Actuaries (ACA) reveal only around 900,000 private sector employees are now in defined benefit schemes open to new employees, compared to over 5 million public sector employees.

Private sector employers and employees have contributed at record levels into defined benefit schemes to eliminate scheme deficits and to meet future benefit costs. However, the report notes that combined employer and employee contributions into defined contribution schemes – which have generally replaced defined benefit schemes for newer employees – have levelled-off at around a third of those into defined benefit schemes.

The ACA says that these levels of contributions when allied to the likely long-term trend in annuity costs due to mortality improvements and volatility in investment markets is of mounting concern.

The survey results underscore the need for radical pension scheme reforms from Government, but the ACA Review and Report says the current Pensions Bill, due for its Second Reading on 7 January is – to date – falling short. Whilst the ACA welcomes attempts to extend pension provision to a wider group of employees through personal accounts (the main feature of the Bill), there is an urgent need to encourage employers to still offer workplace schemes that are better than personal accounts. With many employers considering closure of their existing defined benefit schemes to new entrants and increasingly existing employees, a new design option is needed. The ACA says that amendments to the Pensions Bill removing the ban on employers from being able to offer conditionally indexed pension schemes2 are what is needed.

Removing the ban would provide employers with a type of scheme that offers greater certainty over long-term costs, whilst offering employees a more stable platform for their retirement income than is possible through money purchase schemes.

The 2007 Pension trends survey, conducted by the Association of Consulting Actuaries collected responses from over 330 employers with scheme assets exceeding £127 billion and over 2.1 million members. Key findings featured in the report are as follows:

• 68% of employers said that the Government’s pension reforms would lead to a general levelling-down of pension contributions per employee
• 76% said there would be an increase in the number of scheme closures of existing better (than personal accounts) schemes
• Amongst smaller employers with fewer than 250 employees, 36% said they might abandon their existing pension scheme in favour of personal accounts, with a similar number saying they might revise benefits to meet the extra costs of personal accounts
• Average combined employer and employee contributions into defined benefit schemes are now 29% of earnings, not far short of double the level 5 years ago. Defined contribution/money purchase contributions are on average a third of this level
• The survey found increased defined benefit contributions were not just addressing deficits. Some 65% of companies with such schemes have increased employer contributions to meet future service benefits due to changes in longevity, reduced investment return expectations and increased costs from extra legislative obligations
• Only a minority of schemes reporting to the survey (16%) have moved to a Liability Driven investment (LDI) strategy
• 76% of larger employers (250 employees or more) favour the Government promoting risk sharing schemes that provide a more stable benefit platform than defined contribution

Whilst the survey found over eight out of ten defined benefit schemes were in deficit at their last funding valuation, it also found that two-thirds of employers have made special additional contributions to close the funding gap and responded to the Pension Regulator’s encouragement to generally reduce deficit recovery periods. Seven out of ten schemes expect to remove their deficit within 10 years – many may do better unless the deterioration in the economic climate checks progress.

Commenting on the review and report, ACA Chairman, Ian Farr said:

“Most private sector defined benefit schemes are closed to new entrants and there is mounting evidence of closures affecting existing members. All around we see evidence of employers looking for ways to cap their liabilities for the future, including ‘selling off’ their schemes to outside organisations.
“Government can check this trend with changes to defined benefit scheme legislation, requiring no extra layer of legislation.

“They can simply remove the ban on employers being able to offer ‘middle way’ conditionally indexed pension schemes – a type of scheme that prospers in The Netherlands, stabilising there the retirement incomes of millions of people.

“The Government needs to concentrate its attention on reforms that will genuinely promote good workplace pension provision at all levels – as we have said throughout, personal accounts are not intended to do that.

“If the current legislative opportunity is lost then we will see over the next few years a dangerous gulf growing in provision between those working in the private and public sectors, a gulf that we believe will be seen to be unsustainable.”

The ACA’s 2007 Review and Pension trends survey report is available at www.aca.org.uk on the ‘Latest publications’ and ‘Research’ pages. Printed copies of the review and report are available from the ACA, Warnford Court, 29 Throgmorton Street, London EC2N 2AT or call 020 7382 4594.

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