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DB facing the final blow in rebate freeze

The Turner report’s proposal to freeze contracting-out rebate levels is the final nail in the defined-benefit coffin, says Standard Life head of pension policy John Lawson.

The schemes would be hit by lower Government subsidies because contracting-out rebates would no longer increase in line with earnings, effectively phasing them out over time.

DB schemes have already been saddled with the costs of the Pension Protection Fund, which Lawson estimates at 600m a year, and he says any fall in rebates would be the final straw for many schemes.

Turner held fire on recommending the outright abolition of the rebates.

But Lawson fears there is a danger that the double whammy of frozen rebates and the PPF requirement will lead to further DB scheme closures while those that survive are likely to fall foul of the need for the employer to match contribution levels with those offered by the proposed National Pension Savings Scheme.

Lawson says: “We could see 1.3bn in rebates taken out of DB schemes, assuming 250m in the first year.

“This could be the straw that breaks the camel’s back and we could end up with even less going into private pension savings as a result of Turner.”

Smith & Williamson director Mike Fosberry says: “I think it is almost certain that DB schemes will be reduced. Turner said so in the report. It is not quite the death of DB but it is a terminal situation.

“Offering access to the national pension scheme would make it easier for employers to say they are doing something for employees across the country.

“It is also an interesting point that the report says employers do not believe that pension schemes are an incentive in retaining key staff.”

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