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Security and sustainability in defined benefit pension schemes

The government has published a green paper seeking input on several key issues affecting defined benefit pension schemes. These include member protection, funding and investment, scheme affordability and consolidation.

Over the last 10 years or so the pensions landscape has changed significantly and there are now few private sector defined benefit schemes with active members, let alone accepting new members. However overall around 11 million members in the UK will rely on a defined benefit scheme for all or part of their retirement income and defined benefit pensions hold around £1.5 trillion of assets.

Increased life expectancy, changes to working patterns and the economy mean that defined benefit schemes are operating in very different circumstances from when they first became popular.

The green paper will consider the powers of The Pensions Regulator and encourage a debate about striking the right balance between the needs and aspirations of sponsoring employers, members, the Pension Protection Fund, and the wider economy to ensure that no one group is unfairly disadvantaged. Recent high profile cases have highlighted the risks inherent in defined benefit pensions, and the government is looking to ensure that schemes remain sustainable for the future and that the right protections are in place for members.

The green paper looks at a range of issues that have been raised by various stakeholders – in particular:
•funding and investment
•scheme affordability
•member protection
•consolidation

Ros Altmann, the former pensions minister, said that as most schemes are now closed to new members, the government must put plans in place to manage the ‘run-off’ of DB pension schemes. She said that “If we wind forward a few years, it is clear that fewer and fewer workers will actually be in these pension schemes and employers will be sitting on a legacy liability that has nothing to do with their business at all – they will have little or no business interest in supporting the scheme. Any period of economic weakness is bound to lead to greater sponsor insolvency and we should be planning for such problems now.”

She also pointed out the detrimental impact ongoing DB pension schemes may have on younger workers’ pensions and job prospects. “The green paper suggests the cost of pension accrual for a typical UK DB scheme has risen from around 24% of salary in 2009 to around 50% in 2016. Average contributions to defined contribution (DC) schemes are nowhere near these levels. The greater the cost of supporting the legacy DB schemes, the lower the resource potentially available to pay into younger, newer workers’ DC schemes.”