Ian Farr - Pensions Week

Published: 08 November, 2009

CONDITIONAL INDEXATION SCHEMES

_________________________________________________________________________________

The UK is the only country in the world where certain types of pension scheme in the private sector are required by law to index both pensions in payment and deferred pensions...

Pensions legislation: if government is not prepared to remove the mandatory indexation of benefits in private sector defined benefit schemes, ending the ban on ‘conditional indexed' schemes is a vital first step towards the return of quality workplace pensions which can be afforded by private sector employers

At a time when many private sector workplace pension schemes have closed or are on the verge of closure, and ahead of the inevitable review of many other schemes in the run up to 2012 and the introduction of auto-enrolment and personal accounts, it is an important and urgent legislative reform that employers are given greater freedom to offer ‘middle way' quality pension schemes for their employees, including conditional indexation schemes, that are presently banned under overly restrictive UK legislation.

What do conditional indexed schemes offer?

Conditional indexed schemes provide employees with a far less volatile pension benefit than defined contribution schemes.

Key features are:

Pensions are based on career average earnings and pensionable service.
Future pension increases are pre-funded, but are conditional on the level of scheme funding.
Save on occasions when the scheme funding falls below 100% (the ‘condition'), pension benefits would be indexed in line with a scheme specific index, typically inflation up to a 2.5% cap per annum.
Restoring indexation would be the first priority when the scheme funding level rises above 100%.
Employer contribution rates would normally remain stable whether the scheme funding level is below or above 100%.
Funding would be based, as with existing defined benefit schemes, on the new prudent funding standards set by the Pensions Regulator, who would regulate such schemes.
The schemes would be subject to a PPF levy securing further protection for members (but with lower levies based on the lower risk profile of such schemes).
These are trustee-run schemes offering the prospect of higher investment returns over the longer term due to fewer constraints on investment strategy and the administrative efficiencies involved.

Why is the ‘conditional indexation' option so important?



Mandatory indexation of pensions both before and after retirement in defined benefit schemes is unique to the UK. No other Parliament in the world has placed such an onerous obligation on private sector firms to take on an open-ended commitment in terms of the costs and liabilities involved.

Conditional indexed schemes are an important step in re-invigorating quality UK pensions in the UK - the design is ready to implement now and has a proven track-record in The Netherlands.



Pension increases in conditional indexed schemes are pre-funded and therefore normally can be expected to be paid. They ARE NOT discretionary increases reliant on investment performance being better than assumed.

Printer friendly version

Email this article to a friend

Keywords: SCHEMES, private, sector, pensions, indexation, pension, employers, conditional, quality, legislation, private sector, pension schemes, indexation schemes, conditional indexation, legislative reform, conditional indexation schemes, offer ‘middle way, workplace pension schemes, urgent legislative reform, given greater freedom, UK