Many UK pension schemes have seen an opportunity to offer members an attractive exit route from the scheme by offering an attractive transfer often combined with a cash bung.
These “ETV” arrangements are attractive to Finance Departments as exiting members reduce the strain of the pension on the corporate balance sheet which more than compensates for the upfront cost of the bung. Members get excited about some cash in hand and a chance to be shot of any dependency on a past (or even current) employer.
But for many Trustees and employers, ETVs are a step too far. After all, the DB company pension scheme was set up to give members with a guaranteed pension and the Trustee’s job is to ensure those pensions are paid in full. Why should Trustees duck such a responsibility? The Company may want to get rid of its obligations but they must also be mindful of their reputation , especially where industrial relations may be strained. Unions do not generally look kindly at ETVs. David Norgrove- the Pensions Regulator doesn’t either
So ETVs tend to polarize opinion and the argument is currently very”black and white”. A deeper examination of the nature of the liabilities that a pension scheme has when guaranteeing someone’s pension reveals that much of the problem is associated with guaranteeing pension increases to members once they have retired.
In fact, the impact of guaranteeing pension increases is huge, disproportionate to the perceived or even the real benefit to members. Put another way, members would be amazed at how much more pension they would receive if the Trustees were to offer them the choice of either a level or increasing pension (and if the value of the uplifted pension was deemed fair).
It is a lot more palatable to Trustees and employee representatives to offer a choice of an enhanced level pension or an increasing pension, especially where the choice is accomapnied by proper advice (of course the longest living members would do better from an increasing pension).
Some Defined Benefit schemes have looked at this “middle way” and a few have offered this choice to members. The results have encouraged with members splitting 50/50 between those who wish to retain their increases and those who want more money in their early years of retirement.
Even with 50% of members declining the offer of a level pension a Defined Benefit pension scheme’s liabilities are likely to reduce by 3.5%. That may not sound a lot but in accounting terms it is a massive advantage to an employer. It is enough to give an employer breathing space – perhaps the opportunity to invest in a new strategy- perhaps enough to keep the employer in business.
There’s a lot of talk about “risk sharing” between employers and members of DB pension schemes. “Risk sharing” has become a euphemism for booting members out of the pension scheme- a middle way is needed.