UK - Inadequate national insurance rebates are not the only factor that will encourage companies to move their employees back into the state earnings-related pensions scheme (SERPS), according to Watson Wyatt. It is the political risk of further changes to state pension provision that may be the deciding factor.
When SERPS was introduced in 1978 it was supported by a political consensus that encouraged the view that state provision might remain reasonably stable for the foreseeable future. On this assumption, employers could feel some confidence in offering contracted-out occupational schemes, the benefits and terms of which where heavily influenced by the design of the state scheme.
That confidence has largely disappeared, said Colin Singer, partner at Watson Wyatt. Over the past few decades SERPS has been reduced and now it is to be abolished altogether. Its replacement, the State Second Pension (S2P), does not command support from the Opposition and, on the Government's own plans, is to be cut back at some indeterminate date in the future. All in all, the prospects for long-term stability look much poorer now than in 1978. In such an environment, employers may well feel that it is safer to move away from scheme designs that are vulnerable to changes in state provision. If so, contracting-in may seem the more attractive option.
In conjunction with the introduction of the S2P in April 2002, the government has carried out its five-yearly review of national insurance (NI) rebates. This has resulted in an increase in rebate levels. However according to Watson Wyatt, it is doubtful whether the increase is sufficientto reflect the full increase in costs that schemes are facing as the Government Actuary's Department has taken an optimistic view of index-linked gilt yields and pre-retirement investment returns.
If it was the national insurance rebate issue alone, I don't think many schemes - particularly closed final salary schemes - would consider going through the type of comprehensive plan review that is required to move from contracted-out to contracted-in, said Colin Singer. Indeed, the current rebates have given little financial incentive for occupational schemes to contract-out but, it has remained popular.
However, many pension schemes are currently taking a fresh look at their pensions strategy, regardless of changes in NI rebates, according to Watson Wyatt. Some employers are looking at innovative benefit designs that offer greater control over pension costs while meeting the aspirations of an increasingly diverse workforce. In doing so some are coming to the conclusion that contracting-out imposes too many constraints on scheme design. They are therefore considering contracted-in designs in preference.
If the Government has gambled that the small increase in NI rebates will be sufficient to maintain - or even increase - the number of employees who are contracted-out, the odds may be staked against it, said Colin Singer.
In an environment where employers are becoming increasingly concerned about the risks inherent in defined benefit provision, contracting-in has another important advantage. It offers the opportunity to pass responsibility for a significant element of the benefit package to the State. New schemes - of which there are an increasing number - will be heavily biased to contracting-in.
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