Sir, – The article by Michael Walsh (“Need for major rethink on how pensions are funded”, Opinion, June 13th) offered an interesting description of the problems associated with defined benefit pension schemes, with helpful suggestions for reform. Most direct benefit pension schemes are in deficit, often substantially so. Few employers can afford to contribute enough to eliminate the deficit. There are also problems with the minimum funding standard. Many employers and pension scheme members have already faced substantial increases in their pension contributions.
The problems are probably even more serious than described, however. Last year, the Government introduced a pensions levy on the assets of pensions schemes. This was at a rate of 0.6 per cent of scheme assets for each of the four years from 2011 to 2014. These assets belong to the members of a pensions scheme, but they are being sequestrated.
Again, employers might not be in a position to fund the levy, and so a deduction of the levy in respect of the pension assets must be borne by members of the scheme, by way of a reduction in their benefits.
Existing pensioners, for example, will probably experience a reduction in the cost of living increase which they expect. Deferred pensioners, who are not yet entitled to receive their pension, are like to have their annual statutory revaluation reduced below the rate of inflation. Active members of a pension scheme, who are still employed and paying contributions, expect a pension to be based upon a proportion of final salary multiplied by years of service, but the number of years of service, and hence their final pension, could be reduced.
The levy will continue for three more years, if not longer, with further effects, and, since pension scheme assets are reduced, income from such assets will be less as well. The levy will also result in increased administrative costs which must be met.
In addition, final pensions are nowadays often reduced by the amount of the State pension. If the age at which the latter pension is paid is increased, but people can or must retire at an earlier age, there will be a major hole in pensions which they receive for a while.
A levy of 0.6 per cent may not seem very much, but it will have far-reaching effects. – Yours, etc,