Ian Farr, chairman at ACA: Last month, the Pensions Bill Committee in the House of Commons debated ‘new clause 5’ which proposed an amendment to the Pensions Bill that would end the ban on employers being able to offer new conditionally indexed pension schemes.
The amendment was proposed by the Association of Consulting Actuaries (ACA), with advice on the legal aspects provided by the Association of Pension Lawyers (APL).
Unless the ban on conditionally indexed schemes is removed, private sector employers who decide to close their current pension arrangements in the run up to auto-enrolment and personal accounts in 2012 will have no credible option for the future other than to choose defined contribution (DC) types of pension.
The ACA briefing points out that mandatory indexation of both deferred pensions and pensions in payment in private sector defined benefit schemes is unique to the UK. No other Parliament in the world has placed such an onerous obligation on private sector firms to take on open-ended commitments in terms of the costs and liabilities involved. The ACA says new conditionally indexed schemes offer, to those many mid-sized and larger employers prepared to share risks with employees, a pension arrangement that not only will attract and retain employees, but that also caps employers’ costs into the future (see www.aca.org.uk for further details). Conditionally indexed schemes offer to employees a far less volatile pension benefit than DC.
Pensions are based on career-average earnings linked to service. Save on occasions when scheme funding falls into deficit (the ‘condition’), pension benefits would be indexed in line with a scheme specific index, typically inflation up to a 2.5% cap per annum.
Restoring indexation would be the first priority when a scheme returns to surplus. Funding would be based, as with existing defined benefit schemes, on the new prudent funding standards set by The Pensions Regulator, which would regulate such schemes, with Pension Protection Fund levies securing further protection for members (but with lower levies based on the lower risk profile of such schemes).
- Ian Farr, chairman at the Association of Consulting Actuaries