Employee job security should come before pensions, says Mercer.

The financial consultant is calling on the Government and the Pensions Regulator (TPR) to amend legislation, and allow companies at risk of insolvency to defer contributions to a pension scheme. The firm has set out its proposals in a letter to TPR and the Minister for Work and Pensions.

Although Mercer has welcomed TPR's recent statement which suggested that under some circumstances dividends may not be paid to shareholders at the company pension scheme's expense, it says a more radical change is necessary.

In 2003, high level guarantees over scheme benefits were imposed on businesses which have "forced some employers and trustees to choose between jobs and pension scheme contributions, rather than just dividends and contributions," according to Dr. Deborah Cooper, head of Mercer's retirement resource group.

"The cost of maintaining final salary provision can damage a company's profitability and threaten its future viability," said Cooper. "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 expect that many active scheme members, if offered a choice between employment and their full pension entitlement, would consider accepting reduced benefits," Cooper added. "Current legislation makes implementing this choice very difficult. It is not, and neither should it be, a simple move, but some of the associated regulations mean that in some cases it will be impossible. However, without continued, profitable employment there is no pension security," she concluded.

Mercer is also calling on TPR to announce that it will not exercise its powers to penalise either trustees or employers that have reached reasonable and evidence based decisions, if they agree to weakened technical provisions or to an extended recovery plan.

Meanwhile, TPR has vowed to remain pragmatic and proportionate in its approach to amended anti-avoidance powers, as demonstrated in its draft 'material detriment' test code of practice.

TPR said its eight-week consultation received 29 formal responses, which were generally supportive of the new code, and TPR has made necessary change to the new code which sets out where the regulator anticipates issuing contribution notices in relation to the material detriment test. The code also states that it is unlikely to affect the majority of sponsoring employers.

"In response to feedback, we have made changes to ensure the code is clear and that it interacts well with other rules and regulations," commented Tony Hobman, TPR chief executive.

- Pensions Age April 2009

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