Central to the evolution of any civilisation throughout the ages has been the development of law and order and, by association, protecting citizens by improving their rights, much of which is enshrined in legislation. In a nutshell, reducing inequality.
It would be a struggle to successfully argue that the current level of inequality in pensions is on par with past barbarisms, but it is a serious issue that requires urgent attention.
As we all know, most employers have closed membership of their defined benefit pension schemes to new entrants. Instead these individuals choose to join, or are automatically enrolled into, a defined contribution pension scheme.
While the latter, unlike their DB counterparts, provides certainty of cost to employers, it affords no such certainty to members in terms of eventual outcome.
This gives rise to a material and serious disparity between employees, usually drawn along age cohort boundaries. Some older employees continue to accrue DB pensions while younger employees accrue a DC pension.
This inequality goes further than simply a difference between the type of pension arrangement offered to employees. In many instances it adversely affects the level of employer contribution to a DC scheme, as the DB scheme has a first call on the employer’s available cash.
The question is, is this fair and should it be tolerated in this day and age?
In my opinion the answer is a firm no.
Time to focus on DC
Continuing to allow employees to accrue DB pensions will only serve to increase the financial pressures placed upon employers by adding to funding deficits, upping deficit repair contributions and increasing future accrual contribution rates.
As a result, these financial requirements will constrain research and development budgets as well as capital investment – hampering growth, profitability and ultimately job security and prosperity for employees.
A move from DB to DC would harmonise pension provision across an organisation’s age demographics and benefit the UK economy through increased capital investment in business and people.
This in turn would allow employers to improve their DC contribution rates and ultimately strengthen an employee’s chances of having a decent level of income replacement in retirement.
Staff exodus fears overplayed
Of course, there are two sides to any argument. It would be remiss of me to ignore one of the most commonly used, that continued accrual of DB pensions is a key tool in the retention of older, experienced employees, many of whom occupy senior positions within an organisation.
But we should be giving greater attention to the long term and less on the short term, focusing on the younger existing talent within the workforce. After all, they represent the future for any organisation.
Also, let us not forget that there are not many employers offering DB to new entrants, whatever their age. While an older employee might be miffed at his or her pension accrual being curtailed, they would be hard pressed to find alternative employment offering a DB arrangement.
Change will be as palatable as a £3 bottle of warm Bulgarian oaked chardonnay, but it needs to happen – and soon.
Delay will only exacerbate current DB funding woes and lessen the chances of a decent level of retirement income for DC members. But given the short-term nature of our political system and vested self-interests, one might wonder if meaningful action will be taken any time soon.
Phil Farrell, Partner at Quantum
phil.farrell@quantumadvisory.co.uk
This piece first appeared in Pensions Expert in August 2018 – Continue to full article Here