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Consumer&#39s view

The Government should be very concerned at the findings of a report from


consulting actuaries Towers Perrin, which reveals all too painfully that


the current climate of uncertainty is slowly destroying the final-salary


pension scheme.


The most important aspect of the survey of defined-contribution schemes is


that “in over 50 per cent of cases, defined-contribution pension schemes


are introduced in connection with some degree of closure of a


defined-benefit scheme”.


Stakeholder uncertainty is cited as a factor in these closures and


employers are using this as an excuse to limit their liabilities.


The figures reveal that 62 per cent of companies with final-salary schemes


offered members the opportunity to switch accrued benefits to the new


money-purchase scheme. Clearly, these employers want to get rid of the


open-ended commitment of defined-benefit schemes.


This is tragic. Final-salary schemes were fought hard for in the early 70s


and have been the major factor in ensuring that today&#39s generation of


employees coming up for retirement are able to face the prospect with a


large degree of comfort, and are not a burden on the state and the


taxpayer.


What this Government does not seem to realise is that defined-benefit


schemes, where the employer underwrites the level of income in retirement,


removes the responsibility of providing financially for these pensioners


from the state.


Where stakeholder is concerned, any adviser doing his job properly, has to


point out that if the only option for an employee is a defined-contribution


scheme where the employer pays little or nothing into the scheme – which is


likely to be the case with stakeholders – the individual will be better off


saving in an Isa than a pension.


This means that when these individuals retire, they will be free to spend


their Isa savings down to the £16,000 asset limit, below which they qualify


for non-contributory means-tested benefits such as income support and


housing benefit.


With the minimum income guarantee, currently between £78.45 a week and


£86.0a week for a single person, now linked to earnings rather than prices,


the cost of meeting this guarantee could be astronomical.


Defined-benefit schemes, should be encouraged, given real incentives to


widen their membership and released from unnecessarily restricting


legislation. Unfortunately, this Government does not seem to listen to


anyone.


“The most frequently cited reason for moving from defined-benefit to


defined-contribution arrangements is cost certainty,” says the Towers


Perrin report.


The figures speak for themselves. Only 4 per cent of new final-salary


schemes have been introduced within the last year. The corresponding figure


for 1997 was 26 per cent. “This drop may have been caused in part by the


impending introduction of stakeholder pensions.”


But what is the likely outcome of the introduction of stakeholder? The


answer has to be that unless the Government introduces compulsory


contributions either for employers, employees or preferably both, they


will, quite rightly, be ignored.


The biggest group of beneficiaries will be the non-working wives of


wealthy husbands who will be able to transfer £3,600 a year to their wives


to invest in a stakeholder pension.


If the Government genuinely believes that defined-contribution schemes are


better for the employee, perhaps it ought to take a close look at the


Towers Perrin report.


“Company contributions vary widely but they are generally less than 10 per


cent of payroll,” says the report. Some 28 per cent of employers contribute


less than 5 per cent of payroll and 54 per cent contribute between 5 and 10


per cent – not nearly enough to provide any serious pension in retirement.


Moreover, 25 per cent of employers do not monitor the performance of the


chosen investment funds which means that they cannot possibly be supplying


their employees with any meaningful figures about the possible pension


which the individual will receive.


In this situation, how can even the responsible employee make proper


provision for retirement?

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