Pensions system in crisis says ACA
By Matthew West
The private pensions system is in crisis and requires immediate government action, according to the Association of Consulting Actuaries (ACA).
It says virtually all final salary pension schemes are now closed to new entrants as the high cost of the schemes has forced employers to rethink their pensions policy.
According to a survey of 309 employers published by the ACA today 9 out of 10 defined benefit schemes (DB) are now closed to new entrants.
It says 59% of employers are set to review their pension provision before 2012 when the National Pensions Savings Scheme (NPSS) is due to begin.
Of these 24% of employers are considering making pension benefit reductions when they have to auto-enrol all employees into the scheme in order to mitigate the cost of higher auto-enrolled membership.
Meanwhile, 15% are considering closing their own scheme altogether, including 41% of smaller employers. And only 32% of employers have budgeted for the costs of auto-enrolment
Of equal concern is the finding that 91% of final salary schemes are in deficit while a fifth of schemes have reported recovery from that deficit will take over 10 years.
And employers funding defined benefit schemes are, on average, contributing over 3 times as much per member (average 23.2% of earnings) compared to those funding defined contribution (DC) pensions.
Meanwhile, contributions to DC schemes are increasing slowly, but still over half of all DC schemes reporting to the survey are attracting employer contributions of less than 6 per cent of earnings and less than 4 per cent from employees.
As a result, given much lower investment returns in recent years and longevity improvements, pension outcomes for an increasing number of private sector employees are likely to worsen significantly in coming years.
With taxes on business and individuals likely to rise over the next few years, it is difficult to see anything other than a deteriorating climate for pension savings unless there is a radical change of approach, says the ACA.
ACA chairman, Keith Barton, said: "These are worrying times for all those looking to retire in the years ahead. Whilst the government's personal accounts initiative eventually may bring on board more pension savers, it has to be remembered that these accounts are designed to 'fill the gap' with a low-level pension, where no better pension scheme exists. Quality pensions require higher contribution levels.
"Just 6 per cent of employers responding to the survey say they feel the government's stated policy of supporting quality workplace pensions is working, down from 38% two years ago.
"The huge public policy gap at present is meaningful action to protect good existing private sector schemes and to promote new pension designs that aim to check uncertain and volatile pension outcomes. Our survey found that three-quarters of employers (76%) feel their employees are uncomfortable in taking on the entire investment, inflation and longevity risks that come with defined contribution schemes. However, this is exactly what is happening as defined benefit schemes are replaced by defined contribution."
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