One of the greatest financial achievements of the 20th century, the private sector final pay pension scheme, could be as dead as the dodo within six years, according to Barnett Waddingham’s DB End Gage Index. By 2029, the last of his 5,000 or so DB schemes will be fully funded and ready for a buyout, the company said.
The DB system has brought decent retirement incomes to millions of ordinary people, from bus conductors to auto workers.Now employees are usually auto-enrolled in sub-optimal DC pensions, and they bear all the risks of catastrophic losses – like my article retirement roulette in the mail on sunday highlighted.
Results not only vary from provider to provider, but from one year of retirement to the next. To get the most out of the new DC scheme, individuals also need financial advice.
With a sufficient DB pension, an ordinary worker with 40 years of service can expect to earn a final salary of £30,000 a year, enjoy a pension of £20,000 a year and a public pension of around £10,000. Such employees did not need expensive advisors. They probably would rather retire than work, stuffing their benefits statements in the bottom drawer and forgetting about it until they retire.
This was too long and good. First Actuarial partner Mark Rowlinson explains:
WTW Senior Director Simon Eagle agrees.
Is it possible to rekindle the DB flame?
Is it possible to rekindle the flames and bring back at least a silver-plated DB lite alternative (pre-Maxwell versions), if not a gold-plated final pay scale? Will the Pensions Regulator (TPR) guard the door if employers find a loophole, returning to best efforts and employees sharing the risks?
I put this to a straw poll of 14 experts.
WTW’s Eagle explains: Employers are unable to provide the required replenishment. ”
By contrast, he states:
“DB lite may come in many forms, especially to address the downsides of any increase and loss of additional contributions.”
Perhaps the strongest proponent of DB lite is Henry Tapper, chairman of AgeWage, who believes that “keeping the DB scheme open” is both feasible and desirable.
He explains: “Employers receive highly valued employee benefits and members receive adequate pensions.A scheme to abolish the DB funding code and allow funding as it was before mark-to-market accounting was introduced could benefit millions of people.”
“DB lite could work as a CDC or with endorsements from sponsors based on best-of-estimate funding,” he says. “CDC offers an unguaranteed target pension and commits to a defined level of contributions. DB lite has variable employer contributions, but more certain pension payments.”
“Risk sharing will work well with public housing, unions and many charities that want to keep DB schemes open,” he adds.
First Actuarial’s Rowlinson says accounting rules will need to change “perhaps by redesigning the PPF so that its value can be accounted for somehow.”
But this can be managed by returning a normal retirement age, which automatically adjusts to mortality trends, and some discretion in pension increases, he says.
DBs have many advantages, he says. It helps invest in the real economy and stimulate growth. ”
Nevertheless, he warns that some risks are easier to understand than others and therefore easier to pass on to members. he said: “It works well when the workforce is stable, but when the workforce declines and pensioners (where it is more difficult to share risk outside the CDC framework) active members become far less If exceeded, it may collapse.”
He points out the following about DB lite: He adds:
Chris Ramsey, partner at Barnett Waddingham and chairman of the Society of Pension Professionals (SPP) DB Committee, said that for DB lite, one answer would be to link benefits to funding positions.
he said: “This is similar to the number of DB schemes set up in the UK before the government introduced compulsory indexing. It may have been explicitly linked.”
However, Mr Ramsey said, “In hindsight, should the funded position fall unexpectedly, the scheme would need to be very careful not to allow pension increases when the funded position is high.” I am warning you.
Core for ballast to be replenished in good time
Alternatively, members are entitled to a guaranteed “core” pension and a “top-up” pension that may be reduced if the plan’s funding situation deteriorates, he said.
He adds: Focus resources on current staff. ”
Another way to de-risk a pension scheme is to reduce the future value of benefits. He explains:
Not all proposals are possible under current law.
Clearly explain the extent to which profits are guaranteed if DB lite is reintroduced, and ensure that there is no legal temptation to force surpluses to be used in a particular way if the funding position is good it is essential to
Eagle suggests that “DB lite could be a relief for employers and the public sector that currently offer DB.”
Existing legislation makes it very difficult to achieve an effective DB lite design in practice.
Sackers partner Fuat Sami said a “massive simplification” would probably be needed to make the DB-lite approach viable, abandoning some laws and removing unnecessary complexity. I think it is necessary.
He added: “The specter of the Maxwell scandal still casts such a large shadow over DB legislation that cutting off the resulting sea of protection could be a no-go zone as far as the DWP is concerned. .”
The Work and Pensions Committee is seeking evidence on DB schemes, including asking whether there is an appropriate regulatory framework in place to enable the success of an open DB scheme. Ramsey’s answer is a definite “no”.
he said: “The current regulatory framework does not allow any form of DB scheme (pure DB or DB lite) to succeed in the private sector because of the risks to the sponsor, both financial and legislative/case law. It is becoming very difficult to make future changes to increase costs (as has happened many times in the past with DB schemes).
“A multi-employer CDC scheme is being negotiated by the Department of Work and Pensions (DWP),” said Isio director Iin McLellan. He says these have broad political and industry support, making the chances of undoing his move to DC more real than “DB lite.”
Tupper is more extreme. He urges the DWP to “retire his DB Funding Rules and his DB Funding Code in his TPR.” He hopes to get the best out of a successful system before “Maxwell and financial economists turn pension payments into such a pittance.”
In essence, the great British worker must vote with his feet. Assuming DWP puts the policy into effect first, if a major employer dares to introduce his DB lite, other companies will surely follow suit. It’s time to stop the clock for DB pensions.
Stephanie Hawthorne Award-winning journalist and former editor of Pensions World.
We would like to thank Aon, Mercer, First Actuarial, WTW, Quantum Advisory, the Pensions Management Institute, SPP, Spence & Partners, Cartwright, Zedra Governance, Sackers, Isio, and others for their detailed responses to Stephanie Hawthorne’s request for information.