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Outside edge

It is a competitive world out here. We face competition for new business, competition to recruit and retain quality employees and competition to hold on to existing customers.

These basic competitive elements tend to hold true regardless of the size of the business. Small and medium-sized enterprises right through to the biggest multi-national conglomerates are constantly striving to put their hard-earned cash to work to best effect.

Financial discipline is an important component in any successful business. A regular review of where, and on what, the money is being spent is an essential part of ensuring ongoing success. So when the finance director spots an increasing trend in cost, he or she is bound to act.

When that increasing cost is incurred on a relatively intangible item, you can bet that action is likely to be both swift and potentially harsh. Defined-benefit pension schemes are such a target.

You, I and employee members of such schemes will argue that such benefits are not intangible and most would accept that such arrangements are significantly important but they are a potentially soft target.

What better excuses to get rid of an expensive employee benefit than recent economic conditions coupled with a damaging Government stealth tax, a pinch of new accounting rules and a dash of increased life expectancy.

This intriguing cocktail has been the nail in the coffin (excuse my mixed metaphors) of some defined-benefit schemes and a good excuse for preventing new employees from joining some other schemes. There has, to be fair, been a little sugar coating in that many new employees are being offered a defined-contribution alternative.

The problem with defined-contribution schemes is that all the risk lies with the employee. The employee takes on both the investment risk (will their pension pot be large enough?) and the annuity rate risk (what happens if low annuity rates are combined with low fund values?).

In contrast, the defined-benefit scheme has historically been a plan where the risk is to the employer. The employer pays the cost of the promised benefits regardless of economic conditions.

But defined-contribution schemes have offered an excuse to both the employer and employee to cut back on their pension contributions. This is the real problem.

There is no reason in principle why a good defined-contribution scheme should not offer benefits at least as good as a defined-benefit scheme. The reality is that this will only happen if contribution levels are at a significant level.

A defined-benefit scheme with a funding rate of 15 per cent of payroll is going to be impossible to replace with a defined-contribution scheme with a matching 5 per cent employer/5 per cent employee contribution. Principally, this is because the massive cross-subsidy provided by a defined-benefit scheme does not exist in the defined-contribution world.

If this Government was really serious about its goal of achieving 60 per cent private pension provision against the current level of 40 per cent, it would take action. It could, for example, immediately stop taxing the dividend income from UK equities inside these schemes.

But it will not make such a change of course because, as much as Treasury economic secretary Ruth Kelly might bleat about employers cutting back on defined-benefits schemes, her boss will still want the £5bn each year that he plunders from pension funds (Robert Maxwell must be turning in his grave).

The solution to encouraging employers to return to decent levels of pension funding for their workforce is simple. First, take away the stealth tax and return the pension fund back to a gross fund. Second, do away with the massive regulatory burden that the Government has imposed on such schemes.

Both of these steps are in the control of the Government. The smart money is on the fact that the Government will change neither.

Nick Bamford is managing director of Informed Choice


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