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Final countdown

Firms will use funding statements to close final-salary schemes to new members

It is a sad irony that all the measures the Government has introduced to provide greater security for employees’ retirement benefits have had the effect of encouraging employers to move away from final-salary-linked pension schemes and into money-purchase arrangements with lower benefits.

The new regulations which take effect next month are no exception. The new rules require all trustees of final-salary pension schemes with over 100 members to issue their first annual summary funding statement.

Pension experts at Aon Consulting say that, for many employees, the majority of whom are members of schemes with a deficit, this may be the first time that they will see the financial position of their pension scheme in black and white. Aon warns that firms whose pension plan is in deficit need to be prepared for aggressive questioning from past and present employees, unions and pensioners.

Head of benefits June Grant says: ‘The numbers, particularly those showing the position on wind-up, can make alarming first reading for someone unfamiliar with the financials of a pension scheme and the way that the regulations work.”

Aon is trying to persuade employers to be ready to deal with the concerns of employees but the most likely reaction is that employers will use these statements as an excuse to close their final-salary scheme to new members and new contributions and save money by switching to defined-contribution schemes.

The argument that employers will use will be: “Yes, the figures are alarming and under the circumstances you will be better off with your own clearly defined pension pot into which you can see your contributions going.”

This is all good news for pension consultants, who will still be required to administer the old closed final-salary scheme but will also earn fees and commission advising on the choice, structure and level of contributions to the new defined-contribution scheme replacements.

Pension fund deficits are also an emotive excuse for companies to close their final-salary schemes. Last week’s annual survey from actuaries Lane Clark & Peacock showed that in spite of rising share prices and a record level of contributions from employers, the combined deficit of the FTSE100 companies has improved by only 1bn from 37bn to 36bn in the year to the end of July.

Deficits make good headlines. But LCP also says firms are on target to clear the deficits by 2012. Moreover, two-thirds of firms could pay off their pension deficit from cash in the firm.

But LCP is still warning that more firms could close their final-salary pension schemes. Again, it is Government measures which are providing the impetus for closure. Partner Bob Scott says: “The burden of extra regulation could force management to close more final-salary pension schemes to staff in future.”

Under the new scheme funding legislation, LCP estimates that 30 FTSE 100 firms will need to increase pension contributions if they want to avoid possible closer inspection by the Pension Regulator. In addition, Pension Protection Fund levies will cost FTSE 100 firms’ pension schemes 50m-100m this year. Both these factors will put pressure on pension funds and closures could be the result.

Of course, the real damage was done when Chancellor Gordon Brown mounted his annual 5bn raid on occupational pension funds as soon as he took office in 1997 by removing pension fund tax relief on dividend income.

If the Government leaves a memorable pension legacy, it will be that in less than 10 years, it drastically reduced the pension expectations of a whole generation of employees – and for the foreseeable future – leaving the majority facing a retirement without sufficient income.

Had the Government done nothing, future generations could have expected a comfortable retirement. The only way that the Government can retrieve the situation is to make pension contributions compulsory for all employ-ees and employers – and at a realistic level. But it has not got the guts to do that.

Money Marketing50 Poland Street, London W1F 7AX If the Council of Mortgage Lenders does not think it has sufficient data for the sub-prime market, then it had better get a handle on it soon.

With fears of an increase in repossessions of as much as 50 per cent, there is clearly cause for some concern.

The CML believes this is the area where most repossessions will occur, hardly a surprise, given the nature of the sector.

But it is vitally important that trade bodies, lenders and mortgage IFAs and brokers prepare themselves for possible problems in the market.

Among other things, it may well be viewed as a test for regulation of mortgages by the FSA and many in the consumer lobby.

Repossession is where the clearest consumer detriment occurs, not exit fees – annoying as they may be.

But the fears of the CML and the admission by the trade body that it cannot comment with credibility on this market are serious.

In many ways, brokers have seen their role as securing a mortgage for someone wanting to borrow to buy a home, which is surely why many people use brokers in the first place.

It is also the case that in some cases, in particular, self-cert, there have been some abuses.

In addition, there are fears over interest-only mortgages, with some borrowers not putting enough into a repayment vehicle.

These issues need to addressed with urgency because they threaten to leave people without a home.

Place that alongside the problems with payment protection insurance or at least the mortgage payment protection insurance part of that market and it begins to look very worrying.

In the meantime, we hope the PPI market cleans up its act, the 200,000 people either have something squirreled away to pay their capital and that sub-prime has been doing what it should be doing – helping people in non-standard situations or with a chequered credit history to get on the housing ladder.

But to do so, the mortgage industry, led by the Council of Mortgage Lenders, had better get up to speed first.


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