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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


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


“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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