Actuaries body calls for new pension option

The Government should allow employers a new option for their pension schemes to address a shortfall of contributions into defined contribution plans, the Association of Consulting Actuaries has said.

ACA's survey of pension trends found that four out of five company-run defined benefit or final salary pension schemes were closed to new entrants, up from seven out of 10 three years ago. Only about 900,000 private sector workers are in final salary schemes open to new entrants compared with more than 5 million in the public sector.

Employers and employees have contributed record levels into final salary schemes to eliminate deficits and meet future costs. But contributions into defined contribution schemes that have replaced many final salary plans are about a third of those into final salary schemes, ACA said.

ACA said the low contribution levels, coupled with rising annuity costs and volatile markets, were a growing concern. With many employers considering closing their final salary schemes to new entrants and existing employees, the Government should lift a ban on employers offering conditionally indexed pension schemes, the association said.

Conditionally indexed schemes provide a "middle way" between final salary schemes and defined contribution plans, ACA said. The schemes, which are the main type used in the Netherlands, link the level of pension to average career earnings and have fewer constraints on investment strategy. The key difference is pensions would be indexed, but with annual increases conditional on the scheme's financial health.

Ian Farr, ACA chairman, said: "Most private sector defined benefit schemes are closed to new entrants and there is mounting evidence of closures affecting existing members. If the current legislative opportunity is lost, we will see over the next few years a dangerous gulf growing in provision between those working in the private and public sectors, a gulf that we believe will be seen as unsustainable."

The Government's Pensions Bill, which seeks to address the "time bomb" of inadequate pension contributions, is set for its second reading on 7 January. Its main feature is the introduction of personal accounts, which employers and employees must pay into unless the employee opts out.

ACA said it welcomed personal accounts but warned they could lead to a "levelling down" of pension contributions.