UK - MPs have been warned rejecting conditional indexation for UK pension schemes will lead to millions of private sector workers being exposed to increased volatility associated with defined contribution (DC) schemes in the run up to 2012.

The Association of Consulting Actuaries (ACA) has drafted an amendment to ban the current mandatory indexation of pensions, which will be put forward at the Pensions Bill Committee meeting this week by the opposition Conservative party.

The organisation said the 'new clause 5' is the result of two years of work and in a final briefing to MPs it warned "unless the ban on conditionally-indexed schemes is removed, private sector employers who close their current pension arrangements in the run up to personal accounts in 2012 will have no credible option for the future other than to choose DC".

Ian Farr, chairman of the ACA, said: "If the ‘conditional indexation' amendment is rejected by the Bill Committee then Parliament will be held responsible for what is likely to occur.

"We expect a continued drift to DC, leading to a situation where 100% of investment and longevity risks will fall on the vast majority of private sector employees, exposing millions of private sector employees to the volatility in pension outcomes that are associated with DC," he warned.

Since 1995, the number of members of open private sector defined benefit (DB) schemes has dropped from five million to just 900,000, according to the ACA, as the organisation claimed mandatory indexation is an "onerous obligation on private sector firms" unique to the UK.

The government had previously confirmed the Bill would include some deregulatory measures for pension schemes, including a reduction in the revaluation cap of deferred benefits from 5% to 2.5%.

However, the ACA claimed "it knows of no employers or pensions organisation that feel the Pensions Bill's deregulatory measures as they stand are in any way sufficient to stimulate retention of quality existing or new private sector pensions".

It argued more is needed as personal accounts - scheduled for introduction in 2012 - are "not enough and have not been designed to replace quality workplace schemes".

Instead, the organisation claimed introducing conditional indexation will offer employees a "far less volatile pension benefit than DC", as benefits would be indexed in line with a scheme-specific index - typically inflation or up to 2.5% - except when the scheme falls into deficit, although restoring indexation would be the first priority when the scheme returns to surplus.

Farr warned MPs if they fail to take advantage of the current "legislative opportunity", it is expected the decline in DB arrangements, together with the need of employers to review their pension offerings ahead of personal accounts, will mean that "the near wholesale switch to DC will be completed in a matter of a few years". 

"Once done, the switch back to any form of risk sharing may be slow and difficult - with generations of private sector employees paying the price of a missed opportunity in this Bill," he added.  

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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