In a letter to the Pensions Regulator and the Department for Work and Pensions, Mercer points to the regulator’s initiative that dividends may not be paid to shareholders when a pension scheme funding plan is in arrears, but said further radical thinking is required.
Deborah Cooper, head of Mercer’s retirement resource group, said the high level of funding guarantees has forced some employers and trustees to choose between jobs and pension scheme contributions, rather than just dividends and contributions.
“The cost of maintaining final salary provision can damage a company’s profitability and threaten its future viability. Because employers now have no choice but to maintain the increased security of older generations of workers, they have to make younger generations redundant to reduce operating costs.
“We would like to see the government legislate so that, when funding falls below a certain level, trustees and employers can agree to reduce revaluation rates on certain benefits, including pensions in payment.
“Although this appears to introduce new forms of moral hazard, trustee duties and the existing scheme funding regime should be sufficient to mitigate these risks.”
However, Ian Bell, head of pensions at Baker Tilly, warned “it wouldn’t be at all easy” for trustees to allow Mercer’s suggestions to take place.
“If an employer is struggling, there’s usually not a lot that the trustees can secure [future pension promises] against,” he said. “Trustees could leave themselves open to criticism.”
Bell called for schemes to be moved up the pecking order of preferential creditors during an insolvency situation, to ensure trustees received assets ahead of others.
