Radical action to help UK pension schemes

Findings from the National Association of Pensions Funds' (NAPF) latest survey Pension Provision and The Economic Crisis show that 52% of defined benefit (salary-related) pension schemes currently open to new members could close as a result of the current economic crisis. This is equivalent to 1,000 pension schemes.

The survey shows that, over the last five months, the likelihood that employers will make changes to their scheme in the wake of the current economic environment has increased significantly.

It is not just employers' views that have changed. Workers' confidence in pensions has also evaporated over the past year. In September 2008, at the height of the stock market gyrations, NAPF's Pensions Confidence Index stood at a healthy +22%. Three months later, the Confidence Index is barely in positive territory, standing at just +1%.

The NAPF has called on the Government to take radical action and provide the same bold approach to the pensions sector as it has given to others such as banking and small business. The NAPF Action Plan calls for measures that will:

Enhance scheme member security by making the Government the ultimate guarantor of the Pension Protection Fund.

Build member confidence through joint Government/industry information campaigns on the importance of pension saving.

Improving scheme efficiencies to reduce costs (for example, by facilitating scheme consolidation) by Government, regulators and the pensions industry working together to mitigate the drags on pension provision.

Ease pressure on scheme sponsors through the greater issuance by Government of long-dated gilts which will ease the pressure on scheme sponsor balance sheets and, beneficially, provide Government with access to funding at low rates of interest.

Help schemes manage their liabilities by allowing them flexibility in setting their scheme rules on the key issues of retirement ages and indexation.

Help schemes manage their deficits by allowing longer periods over which these schemes can make good funding shortfalls, including pushing back trigger points (that is, the point at which the Pensions Regulator will investigate schemes) from 10 to 15 years. In the current environment this will give schemes some flexibility.

NAPF Chief Executive, Joanne Segars, said: "These exceptional times call for exceptional measures and new thinking. We have seen bold action from the Government in response to the crisis in other key areas and similar action is now needed for the UK's pension schemes.

"With so many schemes set to close to new members and employee confidence in pensions evaporating, this is a now or never moment if we want to see defined benefit schemes remain a key part of the UK's pension landscape."

Significant closures of open defined benefit schemes to new employees - In the next five years, 52% of defined benefit (salary-related) schemes which currently remain open to new members expect to close this option. The NAPF believes these changes will happen sooner rather than later and is equivalent to the closure of 1,000 UK private sector schemes.

Closures of defined benefit schemes to existing members - 24% of schemes which remain open to new members and 27% which are closed intend to switch existing members to some form of defined contribution or hybrid/career average scheme.

Economic crisis predicted to have a severe impact on schemes open to new members - 96% of schemes surveyed believe that the economic crisis has made the closure of defined benefit schemes more likely (72% said closure was much more likely, 24% said a little more likely).

Large fall in employee confidence in workplace pensions - In research conducted just before Christmas, the NAPF pensions confidence index had fallen back to just +1%, from a figure of +22% in September 2008. The fall meant that the index was lower than in February 2008 when the result was +3%. The gains in confidence made in the middle two quarters of 2008 were effectively lost in the final quarter.