UK - New contracting-out rebates proposed by the government for employers sponsoring DB pension schemes would fall almost £1bn a year short of what the Government Actuary has recommended, Mercer HR Consulting has argued.
According to Mercer, the Government Actuary recommended rebates for DB schemes should be set at 5.8% to allow for people living longer and falling interest rates.
Despite this, the government has set the level at 5.3% which, according to Mercer’s calculations, amounts to a difference of £900m being held back from employers with contracted out pension schemes.
Mercer added that because the rebate paid to DC schemes has also been capped at 7.4%, it has become even more worthwhile for employers with contracted-out schemes to opt their employees back in to the state system.
Deborah Cooper, principal at Mercer, said the low rebate was the stealthiest of taxes.
“If people don’t recognise the rebate’s poor value, the government gets future pension liabilities off its balance sheet at low cost; if they do, it will benefit from higher national insurance contributions as people contract back in, she warned.
If people do contract back in to the state system and the government treats its increased national insurance as a windfall tax, future generations of tax payers will have to pick up the bill.
Watson Wyatt senior consultant Stephen Yeo said: For people contracted out with personal pensions, or company money purchase schemes, the rebates will only provide a pension in excess of the state pension being given up for those prepared to take considerable risk.
Most individuals who are contracted out will continue to be best advised to opt back in. It is widely acknowledged that private pension provision is in difficulty. Although the government talks about encouraging private pensions, their actions suggest otherwise.”
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