Red tape will ‘kill off final salary schemes’

EXCESSIVE regulation risks killing off the last private sector final salary pension schemes, MPS have warned.

The work and pensions committee said so-called defined benefit (DB) schemes could help to boost the UK economy, but faced being “finished off ” by red tape and regulation, even as higher interest rates have dramatically improved funding levels.

There are just 700,000 members of active private sector DB schemes across the UK, which offer savers a guaranteed income on retirement. Most employees now save into defined contribution (DC) schemes, where returns are based on stock market returns.

“Two decades of regulatory policy caution have almost entirely destroyed the UK’S DB system,” the committee’s report said. “DWP and the Pensions Regulator need to act urgently to ensure they do not inadvertently finish off what few open schemes remain by further increasing the risk aversion, even while the risks of default have reduced substantially.”

By contrast, the number of active members of public sector final salary or career average schemes continues to grow and stands at 2.5 million, according to the Office for National Statistics.

These pensions are largely unfunded and paid from taxes collected from today’s workers. The death of media tycoon Robert Maxwell in 1991 sparked an increase in red tape that has forced DB schemes to reduce their exposure to the stock market and riskier assets.

The committee said a new funding code this September could exacerbate the problem, forcing DB schemes to “de-risk inappropriately, potentially leading to their premature closure” because of the overly cautious approach taken by regulators, despite improved funding levels.

It urged the Government to “grasp the opportunities” to improve returns while ensuring value for money. “Plans for the new DB funding regime were forged in a different era when the vast majority of DB schemes were in deficit and amidst concern that employers were seeking to evade their responsibility to underfunded schemes,” it added.

Sir Stephen Timms, chairman of the committee, said: “A new approach to regulation... is needed to protect the best interest of scheme members and allow still open schemes to thrive.” Sir Steve Webb, a former pensions minister, added: “The rules have not caught up with the new world of surpluses.”