In the UK, defined benefit schemes have moved from closing to new hires to closing for future accrual (pension build-up) for all members.
This has resulted in a number of strikes , most recently the AA workforce has committed itself to industrial action for the first time in 108 years.
By contrast, other organisations, who understandably are keeping their heads down, have managed to convince their workforces that switching from DB to DC accrual is in the long-term interests of the workforce and have managed the transition without industrial unrest.
The focus of corporate pension schemes has switched from wealth accumulation to liability management. Investment policies now target the solvency of the scheme and benchmark performance on the percentage of liabilities covered by assets. Sophisticated techniques have evolved to immunize schemes from the impact of increasing member longevity and interest rate and inflation rate fluctuations.
Despite these efforts, companies have been forced to divert huge sums into these DB schemes to shore up their finances, money that has been diverted from investment in the future of its workforce training, job creation and job retention.
I have recently had experience of seeing a large company explain to its workforce through a program of seminars, conference calls and other direct communications, how the company’s DB plan was effecting the share price , growth prospects and its capacity to remain competitive. The company managed to explain quite complex economic issues to their staff in a way that I had not thought possible.
The communications program convinced me that we have greatly underestimated the capacity of non pension people to understand how pensions work.
What struck me most was that the company kicked off discussions by explicitly stating that the alternative pension arrangement that had been put in place would not be as good as the DB plan the members enjoyed. This extremely honest statement seemed to do two things
- It generated a degree of trust between the company and the workforce
- It intellectually engaged members
Once trust and engagement had been achieved, the company was able to explain the problems that the DB plan was creating. The company could explain complex issues such as the volatility of liabilities and the impact on the company’s overall strategy; people attending the events (and attendance rates grew as the roadshow ran its course), asked questions and got honest answers.
The demographics of the organisation I observed seemed pretty typical of most large UK workforces, a mix of races, classes and economic groups.
The members I spoke to after these events were not happy but at least they understood the corporate dilemma. It seems that over time they have reached a consensus that it is in their long-term collective interest to accept the proposed changes and move on without unrest.
A happy secondary consequence of a DB based education program
Helping members to understand the management of their DB plans has a two-fold benefit. It creates the trust and engagement necessary for change and it provides the educational platform necessary for members to properly manage their pension affairs in a DC environment. Perhaps we have got things the wrong way round, perhaps we need to get people interested in what they have got (a DB promise) before we talk about what they might get (a money purchase benefit).