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DB going the way of the dodo

The plight of the endangered defined benefit pension scheme was highlighted this week as Aon Consulting revealed that open final salary schemes have moved one step closer to extinction.

The consultancy grabbed headlines with news that the number of final salary schemes open to new members has shrunk from just over quarter last year to a low of 17 per cent.

Aon’s research follows a recent study by rival consultancy Watson Wyatt showing that employers are forecasting more than 40 per cent of DB schemes will be closed to future accrual for existing members within the next decade, on top of the inevitable further decline in schemes open to new members.

The depressing reports underline the need for the industry and Government to put their heads together and produce viable alternatives and the Department of Work and Pensions risk-sharing consultation, which closed this week attempts to do just that.

But there seems to be little by way of consensus in the industry’s responses. Standard Life head of pensions policy John Lawson is concerned about proposals for conditional indexation or collective defined contribution schemes as he believes they could fail to meet consumers’ expectations and risk a re-run of the with-profits mortgage endowments debacle.

Meanwhile, Watson Wyatt says the Government should avoid dictating scheme designs to employers and instead open up legislation to make it easier for the industry to come up with its own solutions.

Elsewhere in pension policy the industry is concerned that its pleas are falling on deaf ears at Whitehall.

It appears the Government has closed the door on discussions with a group comprising the Association of British Insurers, the Confederation of British Industry and the National Association of Pension Funds over qualifying tests for existing pension schemes to be exempt from personal accounts.

Standard Life’s John Lawson is again the first to make his views on the matter known.

He believes that unless the Government makes it easier for employers to prove that their existing schemes will be as good as or better than personal accounts for the majority of their employees, many will be forced to close down good quality schemes rather than face up to the administrative burden of proving their schemes’ worth.

Lawson believes this could leave millions of low earners out of pocket and goes against the Government’s claims that personal accounts are supposed to complement existing arrangements rather than compete with them.

A DWP spokesman says the Government has not closed the door on further changes but that it believes certain ideas put forward by the industry would undermine employees’ minimum level of pension saving.

The spokesman says: “It is not the method of calculation that counts – but the overall value of contributions. We propose to amend the Pensions Bill to clarify this, and to allow the value of contributions to be assessed over a period of up to a year to allow for workers with fluctuating wage packets.
“There is no reason for employers to make any changes as long as their existing arrangements result in contributions of at least equal value to those required by the Pensions Bill.

“Moving staff into personal accounts would not remove this obligation or make the calculation any simpler for employers – they would still have to ensure overall contributions were of sufficient value.”

In other news, some IFA research this week seems out of kilter with the boom in with-profit bond sales that some of the life offices reported this season.

Managing Partners found in a survey of 200 IFAs this June that 63 per cent of advisers had a negative view of with-profits, while just 13 per cent had a positive opinion of the products.

Perhaps the 13 per cent who favour the products are selling them in the spades – to borrow a metaphor from one of Peter Hargreaves’ recent columns for Money Marketing.

It certainly seems that those advisers that are negative about with-profits are the most vocal, judging by the comments we have received.


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