UK - Employers should look to reduce contributions to final salary plans as a cheaper alternative to winding up schemes, a leading lawyer claims.
Denton Wilde Sapte partner Elmer Doonan suggested changes, including limiting the definition of pensionable salary to basic salary, tightening up ill-health criteria, changing the accrual rate, making early retirement provisions less generous and reducing death-in-service benefits.
He pointed out that many companies feel contribution levels are too high and could pose a threat to their solvency.
Doonan has already carried out the exercise for a large final salary scheme and managed to cut employer contributions by 2.5 percentage points. And he believes it would be possible for companies to halve their contribution levels in most cases.
He said: “Many schemes have added improvements to the benefit structure over the years without giving much thought to whether these were really necessary.
“Often these benefit changes were driven by what the Inland Revenue would permit in a tax-exempt approved scheme and, at the time, the cost issue did not arise because the scheme was in surplus and the employer was on a contribution holiday.”
He said restructuring scheme rules in this way would probably be cheaper in the long run than closing or winding up schemes.
But Buck Consultants principal and senior consulting actuary David Kershaw warned that working out what constituted a discretionary and an accrued right was not always clear.
Kershaw added that such confusion had led the Institute of Actuaries and the Faculty of Actuaries to seek counsel’s opinion on whether ill-health provision was an accrued right.
Norton Rose partner Lesley Browning also pointed out that death-in-service benefits were often written into employment contracts and could not be changed.
Section 67 of the Pensions Act 1995 states that changes to scheme rules must not adversely affect existing pension rights.
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