UK - The National Association of Pension Funds (NAPF) has warned that the new Pensions Bill is likely to "kill off" all future forms of defined benefit workplace pensions including hybrid schemes.
In an open letter to the Chancellor Gordon Brown and secretary of state for Work and Pensions Andrew Smith, NAPF chief executive Christine Farnish said that the current changes to the regime were well intended but risked “the perverse consequence of discouraging and disincentivising any form of future defined benefit provision and reducing innovation in the workplace pensions market”.
Farnish said that the Bill would increase pressure on trustees of DB schemes to adopt funding arrangements at the extreme of the range, where prudence and their legal responsibilities become overtaken by fear of litigation and extreme caution.
“At best, this will increase the financial burden on employers wishing to maintain DB pension arrangements. At worst, it will cause a dramatic acceleration in the pace of closure of existing schemes, with employers being wholly unwilling to provide occupational benefits into the future because they feel they have been forced to hand funding power over to a combination of trustees adopting ultra-cautious investment and/or funding policies and a regulator driven by the objective of protecting the PPF,” she said.
The potential for these factors to cause serious disruption to the efficiency of UK investment markets should not be underestimated, she added.
Farnish warns that the regulatory environment should not “whether by default or by design deliver a seismic shock to an already fragile DB sector or kill more modern, affordable forms of DB at birth, through an overly prescriptive or conservative approach”.
The NAPF recommends setting “realistic” PPF benefit levels, allowing for workable modernisation of past accruals and adopting a flexible and realistic approach to scheme funding. It also calls for a review of the solvent scheme buyout policy and provision of meaningful incentives for sponsoring employers.
Farnish urged policymakers carefully consider the likely overall impact and “unintended consequences” of current changes to the regulatory regime before bringing the new measures into force.
“Unless this is done, more modern forms of risk-sharing in the delivery of retirement savings to millions of citizens are likely to be stillborn,” she said.
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