With recent reports stating that current employees are losing an average of £200 a year from their pay packet so that employers can keep their defined benefit pension schemes afloat, Stuart Price, Partner and Actuary at Quantum Advisory, explains why this is such an injustice:
“Many people already in retirement or getting set for retirement in the coming years will likely have been a member of their employer’s defined benefit scheme for a significant period of their working life. The majority of these schemes are now closed to new entrants and younger workers now must join a defined contribution arrangement.
“To put it simply, a defined contribution scheme offers substantially less than its defined benefit pension counterpart as not enough contributions are being paid to these arrangements. It could be argued that the reason employer contributions are lower is that defined benefit schemes have large deficits – £500bn to be precise – which needs to be paid for by employers now.
“But how has this been allowed to happen? One argument could be that over the years, defined benefit schemes have fallen foul of legislation and now have stringent guarantees that weren’t originally in place when they were set up by employers. While this is great news for those receiving a defined benefit pension, it is the ‘youngsters’ who are ultimately footing the bill knowing that their defined contribution pension will be poor in comparison.
“Ways to even out the system could be to cut down the guarantees on benefits already built up which would significantly reduce the deficits and hopefully allow employers to contribute more into defined contribution schemes.
“The law would need to be changed to be able to do this and although this may not go down well with those in defined benefit schemes as they would ultimately receive less money, it would even out the playing field between generations and help clear up this complex situation we’ve found ourselves in.”