NAPF 2015: The Merchant Navy Officers Pension Fund could close to future accrual, the scheme’s pensions director told delegates, because the end of contracting out will increase the costs of the scheme for employers and members.
The end of contracting out and the attendant increase in cost for both employers and scheme members is widely seen as one of the final nails in the coffin of defined benefit scheme accrual, but many schemes are still unsure about how to handle the change.
The extreme options – either doing nothing or closing to future accrual – are probably the main ones that are on the table
John Cullen, MNOPF
The scheme has been contracted out since 1978 and closed to new members in 1996. As of December last year, there were 80 employers still employing 661 active members within the scheme.
Close or do nothing?
Speaking at the National Association of Pension Funds (now Pensions and Lifetime Savings Association)’s annual conference in Manchester, John Cullen, pensions director at the MNOPF, said the scheme had been considering changes to benefits or pensions age, but decided against it due to the disruption it would cause and the fact contributions are already high.
He said: “The extreme options – either doing nothing or closing to future accrual – are probably the main ones that are on the table.
“Clearly, [closing to future accrual] would be simple, relatively speaking, but the members would lose their defined benefit certainty, it would be politically very sensitive. But it would give quite a lot of flexibility as to what to do about pension provision in the future.”
While the scheme had been considering the end of contracting out, it was also going through a valuation process.
The results of the valuation will increase the cost of providing the same level of benefit to a combined 41.5 per cent of salary from employer and employee – subject to consultation – from around 32 per cent at the moment.
Cullen said: “That broader context makes the impact of the national insurance change look a lot less significant, and really the trustee is considering options as to the future of the scheme in that wider context.”
He added: “The trustee is going through statutory consultation with the employer population over the results of the 2015 valuation and then it will think about the direction of the fund for the future.”
The trustee is also considering doing nothing, he said, as every move has drawbacks; simply accepting the higher cost could be a viable option.
“The only major negative consideration was the impact on the members,” said Cullen, adding active members will be affected by an average £458 increase in cost per year.
“It would be the least disruptive option, you wouldn’t have too many changes. You’d have to do some changes to the rules and administrative processes but they would be fairly minimal.”
Sue Tye, of counsel at law firm Baker & McKenzie, said schemes considering major changes as a result of contracting out need to ensure they go through the consultation process properly.
She said: “You really need to be seen to be taking representations and not making decisions before that process has been completed… It’s not something you do quickly.”
