MPs warn pension reform to trigger wave of scheme closures

Financial Adviser (Scotland)
By Donia O’Loughlin

An influential panel of MPs has warned there is a risk the proposed move to a single-tier pension may result in the closure of existing defined benefit pension schemes, despite industry evidence stating that the reforms will not trigger a wave of closures.

Treasury Select Committee chairman Andrew Tyrie states in a report on last month’s Budget that reform of the state pension could prompt employers to close schemes, as they will no longer be able to reduce their National Insurance contributions. [EXPAND Read more]

Pension consultant Hymans Robertson told the committee during one of several evidence sessions that the prospects “do not look rosy” for those in existing defined benefit pension schemes, saying that the changes may speed up the demise of remaining schemes.

In the Budget (20 March), chancellor George Osborne confirmed the government was bringing forward plans for a single-tier state pension of £144, ending a complex system where individuals qualify for a basic pension that is topped up through a ‘second state pension’ if National Insurance contributions are sufficient.

As everyone will have access to the same single tier state pension of £144 a week, the second state pension will cease to exist and thus the ability for members of DB occupational pension schemes to ‘contract out’ will also end.

They and their employers will therefore no longer be entitled to pay a lower National Insurance rate if they choose to contract out and contribute instead to a private scheme, meaning both will be forced to always pay the higher rate, the report warns.

Steve Webb, minister for pensions, disagreed with the claims that the reforms will precipitate fresh scheme closures, saying that he did not believe that the impact of ending contracting-out would be “seismic” for these schemes.

Otto Thoresen, director general of the Association of British Insurers, agreed, adding: “I do not see this in itself as something that will trigger a huge further decline in DB [defined benefit schemes].”

Joanne Segars, chief executive of the National Association of Pension Funds, also said she believed that DB schemes would continue.

Mr Tyrie says in the report: “The change will result in higher National Insurance contributions for employees with defined benefit occupational pension schemes and their employers. There is a risk that this may result in the closure of existing pension schemes.”

He adds: “The change to National Insurance Contributions as part of the Government’s implementation of the single-tier state pension is the single most significant measure in the Budget for the conduct of fiscal policy.” [/EXPAND]