More retirees are going to have to depend on UK pension annuity rates in 2010 and beyond as final salary pension arrangements open to new members are all but extinct these days and a quarter of employers say they will cut their provision for existing scheme members when new style personal pension accounts arrive in 2012 (if they do, that is). According to a recent survey of more than 300 mainly larger employers by the Association of Consulting Actuaries (ACA), almost 90% of defined benefit (DB, or final salary) pensions are closed to new entrants, with around 18% closed to further contributions from current employees, which is double what it was just four years ago.
The private sector pension situation ”continues to deteriorate”, said Keith Barton, chairman of the ACA. He added that this is a real crisis which the next government, whoever they might be, needs to tackle as one of its top priorities. Around 60% of employers will review their pension provision ahead of 2012 when employers, for the first time ever, will have to enrol their employees automatically either into an existing pension scheme or into the new breed of personal accounts. About 24% expect to reduce the benefits they provide in order to cut the probable cost of automatic enrolment, with around 15% considering closing their scheme altogether in favour of the new style lower-cost personal accounts, a figure that rises to just over 40% for smaller employers with a workforce of less than 250. And all this means that more and more retirees will have to rely on UK annuity rates when they retire.
Employers have also lost faith in the government’s policy of supporting good quality workplace pension schemes, says the ACA. The new personal accounts, into which employers will have to pay only a minimum of 3% of pay across a defined pay band, might actually create more pension savers, Mr Barton said. However, they are meant merely to fill the gap where no better pension arrangement exists, and many employers are at least considering reducing their ongoing contributions to such schemes, dropping down to the level of personal accounts. Trouble is, a smaller pension fund ultimately leads to a smaller pension annuity.
The ACA wants legal changes to take place which it says would make it easier for employers to run risk-sharing or hybrid arrangements where employees would not have to take all the investment, annuity rates, inflation and longevity risks, as is currently happening with a great many money purchase pensions. But the government had failed to act when they could, Mr Barton said, and had actively ruled out some of the changes the ACA sought.
He further added that public policy seems to be locked in to trying to justify ever heavier regulation and cost under the banner of protecting accrued pension scheme benefits for generally older employees, but with little regard for the future pension security of millions of younger private sector workers, and there needs to be a more balanced approach. Interestingly, the Association of British Insurers (ABI) and Age Concern only yesterday called for the age at which people must purchase an annuity with pension fund savings to rise from 75 to 80.
