24th May 2013
If you are fortunate enough to be receiving a defined benefit pension or are likely to do so when you retire, you should probably consider yourself lucky writes John Lappin. The pension is usually very generous and your employer shoulders all manner of risks in terms of investment, and in terms of how long you and other scheme members live. You get a defined amount of pension related to years worked and usually linked to inflation which means it is much more generous than other sorts of scheme.
The problem is that in many cases over the two or three decades, neither employers, politicians nor regulators have appreciated just how much those pension promises would cost.
Among other mistakes, a past Conservative government decided many big schemes were well funded and gave them a contributions holiday. New Labour changed the tax rules around dividends, which many argue amounted to a tax raid of several billion a year. Past attempts to regulate the schemes particularly following the Robert Maxwell raid on the Mirror pension fund failed to ensure schemes were properly funded.
For existing schemes, that is why we constantly hear of them being billions and billions of pounds in deficit. Now the European Union is the latest to try and close the gap between assets and liabilities and even to set up a buffer. It was to include DB schemes in the Institutions for Occupational Retirement Provision directive. But at vote has at least delayed the measure amid warnings from the pension industry that it could see sponsoring employers go bust and wreck economic growth. Votes from EU member Malta were apparently crucial.
It was predicted that DB scheme sponsors could have had to find £500bn in the next few years. While employers and the government may be happy with the ‘reprieve’ what about scheme members? Well, although it is difficult to say, it is likely that many schemes could have seen their sponsoring firms pushed out of business or renewing efforts to shut up shop – or shut up a subsidiary – and hand their schemes over to the pension protection fund.
That could have meant more schemes failing on the UK lifeboat scheme, the Pension Protection Fund. For employees on low to medium salaries, at least, this functions as a significant safety net paying around 90 per cent of pension benefits up to a cap of £34,867.04 but the EU move would surely have put it under much more pressure.
Therefore, it is probably better on balance for the current messy compromises to continue where the Pension Regulator negotiates with scheme sponsors to maintain adequate funding over several years. It can get a little bit like cat and mouse but it is arguably better than a lot of schemes arriving at its door at the same.
Whatever happens, the whole sector is effectively winding down. Even strong employers, with reasonably well funded schemes, have shut them to new members and are now shutting them to existing members with HSBC one of the latest big employers to do so. Reforms to the state pension and the end of contracting out, will increase the National Insurance bill for many employers. If the DB coffin needed another nail, that is probably it.
The trend is for defined benefit to close first to new members, then to existing ones. They will usually be offered an alternative defined contribution pension so their eventually retirement will be funded by a mixture of the two. If you worried about what this means, or indeed about the state of your DB scheme, it might make sense to have it checked out with an adviser who has specific pension qualifications.
But for the DB pension, it does all seem to be too little too late to ensure adequate funding – maybe twenty years too late.