James Bolton, Employee Benefits Partner at Scrutton Bland looks at the rising demands facing employers offering defined benefit pensions schemes.
I have worked with many defined benefit pensions over nearly 30 years and they have constantly been under pressure. Most private sector pensions schemes have closed, and many wound up. Those that still exist are often no longer accruing new benefits for members but are simply being managed by the Trustees (and sponsoring company) to try to meet the promises and obligations to their deferred and pensioner members. The Trustees and company have had to juggle investment risk, actuarial valuations, a raft of associated costs, administration, deficit calculations and agree on sizable company contributions to try to balance the books for the scheme over the coming decades.
By their very nature, pension schemes are long term and the amount of work, uncertainty and cost that remain attached to most defined benefit schemes is considerable. We have therefore seen a recent trend for sponsoring companies (burdened) with defined benefit schemes to look at exit routes. This will often be through securing the remaining pension promises by transferring the assets, liabilities (and making good any deficit) to an insurance company and securing the benefits through bulk annuities and deferred annuities. Alternatively, some may look to move into a group Master Trust arrangement which may reduce the costs and administration but still allow the business to fund any deficit over many years into the future.
Many of the businesses still supporting schemes are also prepared to offer enhancements to the individual members by offering uplifted transfer values. These ‘enhanced’ transfer values may encourage or allow individuals to transfer their benefits away from the defined pension scheme. By doing so the individual gives up their valuable ‘secure’ pension income in exchange for the enhanced ‘pension freedoms’ or flexibility which many defined contribution pensions offer including flexible income withdrawal, access to more (or less) of the fund to meet any needs and potentially better death benefits allowing any remaining fund to be left to others such as grandchildren. To determine if this is the right thing to do it is important that the members have access to specialist pension advice; indeed in order to transfer members with a transfer value of over £30K members must receive advice to enable the Trustees to proceed with any transfer.
The costs and liabilities of defined benefit schemes and pressure on them are continuing to rise. Even those backed by public bodies, the Local Government Pension Scheme LGPS, University Superannuation Scheme USS and now the Teachers’ Pension Scheme TPS are coming under pressure and having to adapt to the new norms. Private schools where the teachers are participating in the TPS are now facing a 43% increase in the employers’ contribution to support their teachers’ membership. The TPS is an ‘unfunded’ public sector scheme effectively supported by the exchequer and taxpayers. Unfunded net liabilities in all public sector schemes now total more than £1.3 trillion. Around 15 per cent of public sector pensions are funded and have assets of £266 billion compared with liabilities of £370 billion. The combined liability (£1,425 billion, 75 per cent of GDP) is up 26 per cent since 2010. These growing public sector liabilities will inevitably lead to increasing contributions and the call to reduce or cease the ‘secure/defined’ pension guarantees. The initial impact of this may well be independent schools looking to alternative pensions and benefit schemes for their teachers and withdrawing their future membership of TPS.
Now more than ever, the individual is expected to save and take control of their own finances and investment decisions to meet their future pension, which means it is important that there is sufficient understanding and education about investment and pensions. Often a great place to deliver this is in the workplace, and a good employee benefits adviser should be able to help deliver professional advice to your employees as part of a benefits package. With around 17% of the population living today (and one in three of all babies born today) expected to reach their 100th birthday we need to plan and take action now!