Avoiding the shared risks in defined benefit pension schemes
Government proposals to allow for more risk sharing between employers and pension scheme members in occupational defined benefit (DB) schemes would only work for a few, larger pension schemes and would not by itself slow the trend away from DB schemes, says ACCA today in its response to a Department for Work and Pensions (DWP) consultation on this complex issue.
ACCA is also concerned that if the proposals become law their implementation would impact most heavily on those who have already retired and drawing their pensions.
John Davies, head of business law at ACCA says: “Under the arrangements discussed in the consultation paper, the new rules on risk sharing would allow schemes not to index link pensions in payment, or revalue deferred benefits, if the scheme was not in surplus. This new approach - called conditional indexation - would clearly have a disproportionate impact on those already in retirement - these are the very group of people who are most vulnerable to inflation.”
Mr Davies added: “Conditional indexation should not be seen as the only approach to the sharing of risk or the sole answer to scheme funding problems. Over recent years many schemes have raised their pension age, lowered pension contributions and, in many cases, switched to defined contribution (DC) schemes, all with a view to reducing the level of risk assumed by the employer and increasing the risk borne by members.
“While the volatility and uncertainty relating to scheme funding requirement is naturally of great and on-going concern to scheme sponsors, there are other factors, such as the burden of regulation in the DB sector and the sheer complexity of the rules, which present their own problems.”
In its response to the DWP, ACCA says the proposals would also have serious repercussions for pension scheme trustees. Conditional indexation would force them to treat members differently when they are actually required to treat all members equally.
Davies concluded: “ACCA believes that the plans for risk sharing have the potential to cause significant detriment for scheme members, especially those already in retirement. There should therefore be full consultation before any such schemes are put into effect. Further, the plans would only be a partial answer to current scheme funding problems as they would take many years to bear fruit and would be unlikely to be taken up by more than a minority of, mainly larger, schemes.”
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Notes to Editors
1. ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We have 325,606 students and 122,426 members in 170 countries worldwide.
2. ACCA believes that globalisation of business requires one set of reporting standards. We favour principles-based, not rules-based standards, which is why we support the worldwide implementation of IFRS.
3. ACCA believes that tax systems should be transparent, simplified, fair and certain.
4. Complying with regulations affects SMEs disproportionately, which is why ACCA urges governments and standard setters to ‘think small first'’
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For further information, please contact: Helen Thompson, ACCA Newsroom phone: +44 (0)20 7059 5759/ 0772548654 e mail: helen.thompson@accaglobal.com