UK - Consultants fear brewing giant Scottish & Newcastle's likely decision to contract back in to the State Second Pension will open the floodgates for other employers to follow suit.
Scottish & Newcastle is considering closing its £1.5bn final salary scheme to new members and says any new scheme will contract back into S2P.
When contracting-out was introduced in 1978, the government offered generous National Insurance rebates for those taking that option.
But S&N – well-known for its Newcastle Brown Ale and John Smiths brands – says the rebates are now too low to make contracting out worthwhile.
S&N head of pensions and executive remuneration Ray Martin said: “Scottish & Newcastle is not prepared to take on the risk of paying for the government’s pension promises without sufficient reward.”
Mercer Human Resource Consulting agreed and said contracting out represented a “bad financial deal” for employers. It believes that up to three million individuals will move away from contracted out benefits, putting further pressure on the social security system.
Mercer worldwide partner Dick Strattan said the momentum for the rush to contract back will come from firms closing their final salary schemes.
He said the shift to DC was building into a “head of steam” and further problems would come when stakeholder and personal pension policyholders realise what a poor deal contracting out represents.
Gissings director of actuarial consulting Paul Clark said employers were looking at contracting back in as a way of controlling final salary costs.
He also likened the low NI rebates to another “tax on pensions” and said “most actuaries would argue it is not good sense to contract out”.
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