The Government’s Green Paper on pensions reform fudges the fundamental issues, according to Mercer Human Resource Consulting, and employers will need to find an impossible £300 billion to guarantee to pay the pension promises they have made.
Responding to the Green Paper, Simplicity, Security and Choice: Working and Saving for Retirement, Tim Keogh, European Partner at Mercer, expressed concern at the shortfalls in the government’s proposals: "The government has fudged two of the fundamental issues that led to this review: the nature of employers’ commitment to occupational schemes, and the need for incentives to help them carry the costs and risks of this commitment.
"Its package of measures will stand or fall by how the issue of benefit security is resolved. Employers have been criticised for stepping away from their obligations to members of final salary schemes. This begs the question of what, exactly, their obligations are or should be – particularly important for solvent employers wishing to close their schemes," he said.
Over the years, government intervention has steadily increased the obligations of schemes towards their members, and increased costs for employers. These increases were largely concealed by healthy investment returns in the 1990s, but have been quickly exposed in the current financial and regulatory environment.
"The extra funding needed to fully secure existing benefits, with all the bells and whistles, could now be as much as £300 billion," said Mr Keogh. "Clearly, it is not viable to expect employers to carry this huge burden of cost. It would destroy the competitiveness of British business.
"The government should legislate on a realistic level of promise that companies should now be expected to stand four-square behind. Instead, it has fudged the issue by leaving it with scheme actuaries and trustees to sort out with employers."
Mercer has proposed that the government should facilitate a transparent process of restructuring scheme benefits into two components:
- A core benefit exclusive of pre- and post-retirement increases, subject to a government requirement for solvency funding and corresponding protection against scheme or employer reorganisation.
- Additional benefits provided through indexation and revaluation that could be dependent on employers’ ability to carry the burden.
A crucial part of this restructuring would be openness with members on what their scheme can and cannot be expected to deliver.
"By providing a minimum level of secure benefits, the membership as a whole would be better protected. Companies could then provide an enhanced level of benefit according to what they could afford," said Mr Keogh.
Commenting on other issues, he added: "Disappointingly, the government has provided no new incentives for pension saving, despite its aim to increase the role of private sector pensions. Nor are there any proposals to address the disincentives caused by means-testing in the state system. We are therefore unlikely to see a notable increase in future private pension provision, especially at the lower earnings levels.
"The government has also failed to alleviate the confusion created by its contracting-out system. The inadequacy of the current rebates has caused a flood of schemes contracting into the State Second Pension Scheme, at a time when government policy is supposedly to reduce the burden of state pensions."