Unless the UK's "over-prescriptive and complicated" pensions legislation is simplified, then hybrid or 'middle-ground' pension schemes will never be considered by UK employers, says Mercer.

The consultancy giant has argued that market conditions have left the weaker aspects of DB and DC exposed and so more emphasis should be put on the middle ground to avoid problems for future generations.

However, the firm claims that three main issues hinder the development of a strong 'middle-ground' environment, where risk is shared in a fairer way between employers and their workers: compulsory indexation of benefits on leaving service and once in payment; reduction in pension payments; and clarity over the requirement for 'middle ground' scheme s to pay levies to the Pension Protection Fund (PPF).

"It is undeniably important for companies to move to reduce their pension risk exposure and rising costs," commented Chris Sheppard, a principal at Mercer, "but in the stampede to more affordable pensions, DC has by default taken pole position while the middle ground has limped on in pursuit, hobbled by inflexible legislation. Such middle ground solutions more fairly balance the risk and reward trade-off between the employer and employees.

"From an employee perspective, a move from a final salary to a DC scheme is a hospital pass - all the risks pass from the company to employees in one swift move. The lack of alternative options to final salary and DC, however, encourages companies to treat DC as the default option when reviewing pension provision. Adopting some of the European approaches could provide a range of new choices and reinvigorate the industry," he added.

On the subject of the levy, Sheppard said that the PPF must become more flexible to ensure that any levy which hybrid schemes are required to pay is proportionate and does not cross-subsidise schemes targeting higher benefits levels.

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