UK - Numerous changes to pensions law have made the risks and costs of final salary schemes unacceptable, the Society of Pensions Consultants' president claims.
And Donald Duval – speaking at the SPC’s annual dinner – advised any companies with open defined benefit plans to “consider their options”.
Duval said DB schemes were fundamentally flawed because they failed to address the “key issue” of political risk.
He said: “In the past five years, companies have found the risks and costs of final salary schemes unacceptable. There have been a number of reasons for the cost increase, including improvements in mortality and falls in stock markets.
“But one of the key factors has been legislative change.”
Duval added: “Over the past 30 years, we have had governments and ministers from every shade of the political spectrum – from Thatcherite Tory to left wing labour with plenty of wets and Blairites in between.
However, one constant has been numerous changes to pensions law designed to improve the social justice of the pensions system, or to reduce the cost to the Revenue.”
He said the combined effect of these changes had been to more than double employer costs.
Duval stressed that because the cost of a DB scheme falls on the employer, “a company with a defined benefit scheme is taking a substantial political risk”.
He added: “Of course, companies take political risk all the time – they have to. But sensible companies try to restrict such risks to their core activities. A defined benefit pension scheme is not a core activity.”
Duval went on to dismiss the many “alternative” types of DB arrangements that were being mooted – cash balance and career average revalued earnings, for example.
“These designs will only be successful if they address this key issue of political risk. Most fail to do so.”
He said all companies considering an “alternative” DB plan should ask themselves: “If the government changes the rules, will my costs go up?”
“If they will, then you have retained the political risk, which in the long-term has been the biggest single factor for final salary schemes.”
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