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Pension shake-ups due as companies take schemes in hand, warns Mercer

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Consultancy firm Mercer HR is warning of new shake-ups in the way company pension schemes are being run, as organisations move to further reduce the size of their responsibilities to current and future pensioners.

According to the firm, many final salary schemes which involve the greatest level of contribution by employers are likely to be closed to new members or adapted to reduce the risk on the employer. Mercer expects the costs of running a typical final salary scheme to increase by 30% over the next five years.

Peter Bowers, European Partner at Mercer said it was time for employers to face up to the potential problems likely to be caused by stock market uncertainty and longer life expectancy: “Employers everywhere still need to bite the bullet and take some hard decisions on cutting their pension costs.” However, he added that simply closing a final salary scheme to new members would be unlikely to significantly reduce the burden on employers unless they had a high staff turnover.

Instead, employers should look at offering a range of alternative schemes which would allow them to share the risks of pension funding with their employees, according to Mr Bowers: “Plans to remove the complex tax limits on pension benefits will enable employers to consider a whole range of innovative approaches to pension scheme design. These new arrangements will become much easier to run once the government’s proposals on tax simplification are introduced.”

Among the alternative options available for employers to consider offering are:

  • Shared-risk final salary schemes, where employer and pension member share the risk by contributing different amounts to the scheme at different times
  • Career average schemes, where benefits are calculated according to each year’s salary earned, and then valued in line with expected inflation rates at the time of retirement
  • Hybrid schemes, where some members are provided with money purchase options and others with final salary pensions, according to the age or salary of the member
  • Schemes with cash-based promise, where the employer provides a lump sum on retirement which the employer is then responsible for investing
  • Cash balance schemes, similar to a money purchase scheme but guarantees attached
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