The future of pension provision is uncertain.
The immediate withdrawal of dividend tax credits for pension funds announced in Gordon Brown's first Budget has threatened the old-age provision for employees paying in to money purchase schemes, schemes where contributions but not payouts are defined. Will employers help out with increasing contributions, or will keeping costs down be their main priority?
Abolishing tax credits has effectively cut the value of pension funds' income from UK equities by 20%. Experts predict a fall of up to three quarters of a per cent in the funds' long-term investment return and an 11% reduction in their asset values. To offset the fall, contributions may have to rise between 5% to 25%, costing up to £50 billion over the next five to 10 years according to the National Association of Pension Funds (NAPF). These estimates may fall if the chancellor gets his predicted improved returns from UK equities, but that is by no means an accepted concept.
Employees paying in to money purchase or defined contribution schemes have full responsibility for bearing any increase in contributions if they think the schemes' funds won't provide an adequate pension. Employer contributions meanwhile can continue at current levels. 'Employees will certainly lose out if they are in money purchase schemes,' says Peter Crutchett, partner in KPMG's pensions consulting practice. 'It's probably too early to see if employers will do anything to help by raising contributions levels.' Employers may be moved to help if they want to keep hold of strategic personnel, says Andrew Black, marketing manager with insurers Standard Life. 'If a company has a key employee and tends to look at remuneration in terms of the overall package, then the employer might decide to increase contributions,' he says.
To date the signs are that companies are more concerned to keep pensions costs down. And the only employers directly hit by the loss of the tax credit are those offering final salary or defined benefit schemes, schemes which commit the pension provider to a certain level of payout when the time comes. While the employee pays a specified contribution, the balance is made up by the employer. Without the tax credit, these employers will have to increase contributions or to come out of contributions holidays early. A recent Arthur Andersen survey of companies offering final salary or defined benefit schemes found that over one-third are considering passing some of the extra cost on to employees. 'In most final schemes, the companies bear the balance, but why not make it a shared responsibility?' asks Carol Woodley, partner in charge of the pensions practice at Arthur Andersen.
Two-thirds of the survey's respondents predicted a switch from final salary to defined contribution or money purchase schemes. 'Companies are going to look at their scheme types,' says an NAPF spokesperson. 'We fear a move away from defined benefits to defined contributions.'
The most radical option would be for companies to abandon company schemes altogether, although just 6% of companies in Andersen's survey said they might offer no pension arrangements at all.
The actuaries are still assessing whether the damage to funds is as bad as first feared. An Asda spokesperson says early predictions are that there will be 'no effect on the pension scheme looking forward five years'.
Certainly most employers would be wise to delay plans for changes in pension funding or structure until a clearer picture of likely funding shortfalls emerges. As KPMG's Crutchett says: 'We are advising clients not to rush into any sudden decisions.'