Pensions, not normally the sexiest topic for journalists, have recently occupied many column inches in the United Kingdom, prompted in part by the publication of two major reports on long-term savings (Sandler and Pickering). Compounded by recent stock market turmoil, the closure of many final-salary schemes to new members and their substitution by money purchase (with risk borne by the employee) are also underscoring the message that many face the possibility of impoverishment in retirement or the need to work for longer.
A recent survey by the Association of Consulting Actuaries revealed that fewer than four out of 10 final-salary schemes are open to new members and close to half of those left are currently contemplating closure. Moreover, the survey found that money-purchase contributions are generally falling far short of those that were going into final-salary schemes. To add to the pervading gloom, consulting actuaries Lane, Clark & Peacock have found that money-purchase pension plans have halved in value over the past three years.
The National Association of Pension Funds (NAPF) expects that its own survey (scheduled for publication at year-end) will reflect a similar acceleration in the closure of final-salary schemes, which is already in evidence in its 2001 Annual Survey. For the NAPF, there is a confluence of factors contributing to the apparent demise of the final-salary scheme: the increasing longevity of the population, the rising cost of benefits, poor market returns and the new accounting standard FRS 17. Whilst the NAPF is often perceived to be a bastion of DB, it believes sufficiency in contribution levels is more important than benefit design. (The average employer contribution to a final-salary scheme is 15.4%—6% for a money-purchase scheme, according to the NAPF.) The NAPF’s membership comprises 1,000 pension funds (approximately £650 million, or US$1.03 billion) and 400 to 500 business members.
In the NAPF’s view, the significance of FRS 17, whereby the assets of a scheme are measured at current fair (market) values, essentially a snapshot, has been overstated; the fund’s overall health, i.e. the ability to meet its liabilities, is more important. The issue is aggravated by the fact that in the past decade, many employers were prevented from boosting the funding of the schemes by Inland Revenue regulations and had to take contribution holidays that are now coming to an end. The NAPF suspects that many a finance director has won the argument over scheme closures by citing FRS 17.
Despite the established trend towards defined contribution (DC) and hybrid schemes, the NAPF concurs with the analysis proffered by UBS Global Asset Management in its Pension Fund Indicators 2002 that DB schemes will account for the lion’s share of occupational assets for at least one decade. For now, approximately 80% of pension scheme members in the United Kingdom are in DB schemes although about 80% of schemes (many with memberships in single figures) are money purchase. New entrants tend to have lower salaries because they are younger and usually get lower employer contributions as a percentage of salary in new DC schemes—thus, the switch to DC may take a long time to have an impact on accumulated assets.
Both the Sandler and Pickering reports call for simplification and the cutting of red tape. (The Pickering report would ideally wish to see three generic products: occupational DB pensions; employer-sponsored money-purchase arrangements; individual pension arrangements.) The U.K. government has committed to respond in the autumn with a Green Paper to the reports—the Sandler Review of Medium and Long-term Retail Investment and Alan Pickering’s A simpler way to better pensions. The Green Paper (a preliminary report of government proposals for discussion) will also take into account the Inland Revenue’s review of tax legislation in the pensions field.
Source: Cerulli Edge Retirement Issue – August 2002
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