Thursday, 3 January 2008

Levelling down - who is to blame?

One thing you can't accuse the pensions industry of is reluctance to use alarmist language. Add to that its desire to see everything that goes wrong as being the fault of stupid, meddling politicians/civil servants. As an example of this, I was struck by the following bizarre assertion in the Association of Consulting Actuaries' pension scheme survey which you can find here. Having had a pop at the Government for not doing enough to prevent levelling down, the ACA claims -

"[T]he survey results from this and other surveys shows ample evidence that levelling-down has been happening for some time and is predicted to continue apace by those who run private sector firms and schemes."

Two things bother me about this. The first is that this paragraph - and much of the ACA's commentary in the report - seem to portray levelling down as an inevitable reaction to the Government's reforms. It suggests that firms have no choice but to close DB schemes and pay low contributions into DC schemes. Whilst I do not underestimate the cost pressures some companies are under, absolving them of any responsibility for the decisions they make in respect of pension provision for staff clearly goes too far. They have a choice whether to pay 3%, or 5% or zero.

Secondly, when people talk about 'levelling down' they mean the way that some firms will use the introduction of a minimum standard as a reason to reduce current provision to the specified minimum. Again they have a choice whether to do this. But you can see that since the Government is saying that employers only have to pay 3% into Personal Accounts this might offer unscrupulous employers the cover to reduce their contributions to that level if they are currently paying.

There's just one problem. Personal Accounts don't come into effect until 2012, so how can companies be 'levelling down' to something that doesn't exist? According to the ACA this has been happening for some time, but what exactly are employers levelling down to, since there is currently no minimum? In fact the reality is that many employers have always levelled down - to zero - which is why, even at its highpoint, occupational pension coverage never got much above half the workforce. That is exactly why some sort of minimum threshold is required. No doubt some employers will level down - and no doubt some will be advised on such decisions by consulting actuaries - but many employers will also have to level up. That means that coverage will increase, likely particularly amongst women.

The ACA commentary is particularly frustrating as much of the rest of what they say sounds sensible, for example their promotion of risk-sharing schemes (though these would of course provide work for... err... actuaries). But the kneejerk 'levelling down' commentary makes you question their judgement elsewhere.

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