Last week, a government consultation on the future of defined benefit (DB) pensions – the type that pay an income based on our salary and length of service – closed to submissions. Officials are squirreling through the contributions, ready to present the post-election Pensions Minister with their policy options.
The TUC response was clear: DB schemes remain affordable to most sponsoring employers and central to members’ retirement plans. However, some reforms, such as those to support open DB schemes, might be helpful.
Contrary to the myth that DB schemes died out in the private sector long ago, they remain of vital to the retirement prospects of many.
Around 11 million people have benefits built up in private sector DB pension schemes. These entitlements are a substantial portion of the overall pay packet received by many workers.
It is the case that too many good quality pension schemes were allowed to wither away from the 1980s onwards. Indeed, until recently many workers in the private sector received no pension contributions at all.
Yet, more than one in ten DB schemes (13 per cent) remains open to new members. They give both old and new workers can build up entitlement to good quality retirement provision.
Within the FTSE-100, 57 companies provide DB pensions to at least some staff.
In the TUC’s response to the consultation, we emphasised that those defined benefit pensions that remain are a crucial element of our quest to secure adequate incomes in retirement. DB pension schemes are doing the job we need pension schemes to do. They offer the most secure form of providing a predictable level of income in retirement.
Yet 90 per cent of those in defined contribution schemes, those most likely to be offered to new employees, are likely to fall short of generating the level of replacement income thought necessary for a reasonable standard of living in old age.
DB schemes are an efficient vehicle for providing retirement benefits. This is in part because their collective nature means risks are pooled, allowing greater scope for investment in return-seeking assets than individuals saving on their own.
Trade union members have repeatedly expressed great appreciation of such schemes. They recognise the importance of adequate pensions to provide an income in retirement. Often they have sacrificed other forms of pay to ensure their continuation. Sometimes members have taken industrial action to defend them.
As government’s consultation document makes clear, DB pensions are not in crisis:
In particular, we agree with the document’s conclusion that: “We are not persuaded that there is a general ‘affordability’ problem for the majority of employers running a DB scheme. Consequently, we do not agree that across the board action is needed to transfer more risk to members, or indeed to reduce members’ benefits in order to relieve financial pressure on employers.”
The Pensions Regulator estimates that among those companies listed on the FTSE-350 making deficit recovery contributions (DRCs), their dividend payments were on average 11 times this amount. This compares to six times in 2010. Most companies can afford to at least maintain DRCs, and many can afford to increase them if necessary.
With this background, we believe there is little reason to pursue two potentially damaging avenues of reform.
However, there are areas worthy of consideration for reform:
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