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
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
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's 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
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
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
“The most frequently cited reason for moving from defined-benefit to
defined-contribution arrangements is cost certainty,” says the Towers
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?