Wednesday, 30 May 2007

More final salary closure to come say actuaries

From the Professional Pensions site -

FINAL salary schemes will be hit with a second wave of closures to new entrants and future accruals, the Association of Consulting Actuaries warn.

The trade body’s chairman Ian Farr said new style shared risk schemes are the future of occupational pensions in the UK urged the government to legislate quickly for the new “third regime”.

He said: “We need a new vision for the future of occupational pensions in this country. From employers that we are advising, we know there is a second wave of closures to future accruals coming.

”Most schemes will be replaced by defined contribution arrangements. Our concerns about these schemes is how they apply to moderate earners - the volatility of return from DC is at issue.

“Risk sharing schemes can offer the ‘safety valve’ to provide the degree of cost and benefit predictability that employers need, while providing members with a more stable pension than DC.”

Hewitt actuary Richard Mulcahy said a new model must address the reality that employers only want to be exposed to a limited amount of risk.

”Indexation, both pre and post retirement needs to be in place. It does not give absolute certainty that everyone would like but it is a compromise necessary to limit costs that companies will accept,” he said.

Members of a shared risk scheme would remain contracted in to give a guaranteed layer of DB. The employer would determine the accrual rate based on pay in a year.

The employer would control expected cost of future service accruals using “prudent assumptions”. Employees would be guaranteed the value of their benefit will at least exceed the value of heir contributions.

Farr and Mulcahy said it was essential legislative changes were made to accommodate the shared risk schemes and said the current government deregulatory review should be addressing this.

Mulcahy said risk sharing would also allow mid to large sized employers control over their potential section 75 debt and could lead to lower Pension Protection Fund levies.

Farr said: “This isn’t pie in the sky – shared risk type schemes must more common than DC in the Netherlands. Many companies do not want to shift 100pc of the risk on to employees.

”We need to embrace indexation. We need to get people excited about occupational schemes in this country. Simplifying legislation will allow us to move forward to sharing risk between members and employers. This is a once in a generation opportunity.”

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