According to the U.K.’s The Independent, employers and employees have contributed record levels into final salary schemes to eliminate deficits and meet future costs, but contributions into defined contribution schemes that have replaced many final salary plans are about a third of those into final salary schemes, ACA said. The group said the low contribution levels coupled with rising annuity costs and volatile markets were a growing concern.
The ACA suggests conditionally indexed schemes provide a “middle way” between final salary schemes and defined contribution plans, according to the news report. The schemes link the level of pension to average career earnings and have fewer constraints on investment strategy. The key difference is pensions would be indexed, but with annual increases conditional on the scheme’s financial health.
“Most private sector defined benefit schemes are closed to new entrants and there is mounting evidence of closures affecting existing members. If the current legislative opportunity is lost, we will see over the next few years a dangerous gulf growing in provision between those working in the private and public sectors, a gulf that we believe will be seen as unsustainable,” said Ian Farr, ACA chairman, in the news report.
A survey of pension trends from the ACA found that four out of five company-run defined benefit pension schemes were closed to new entrants, up from seven out of 10 three years ago. Only about 900,000 private sector workers are in final salary schemes open to new entrants compared with more than 5 million in the public sector.
The U.K. government’s Pensions Bill is set for its second reading on January 7 and its main feature is the introduction of personal accounts, requiring employer and employee contributions unless the employee opts out. ACA said it welcomed personal accounts but warned they could lead to a “leveling down” of pension contributions, the news report said.