Is there a future for defined benefit pensions?

The TUC has published a working paper written by my colleague Hilary Salt entitled “the future of defined benefit pensions provision” which is a very good read. You can reach it here.

The wags among you may consider that you could tweet on this subject (without a link) and still have space from 140 characters. Read this and change your minds!

Hilary has her faults, supporting Manchester United among them, but she has  a big brain and a bigger heart and if there’s one person I’d trust to be on my side in a pensions negotiation it would be her. She doesn’t just keep me honest, she offers a guiding role in lots of other forums, including acting as the independent adviser to the Governance Group of the NHS Pension Scheme and it’s not for nothing that the TUC turn to her for some good sense.

The paper takes the reader through the difference between funded and unfunded pension schemes, tips its hat to the system of pension indemnity assurance advocated by Con Keating and concludes that the failure of nerve that has resulted in employers closing defined benefit schemes puts them in “the worst of all possible worlds” where schemes become progressively less efficient and disconnected from their stakeholders.

The central and most difficult section of the paper sets out the fundamental reasons why employers set these schemes and demonstrates how collective pension provision has advantages not just to the member but to the business.

The paper demonstrates Hilary’s deep understanding and commitment to what is fair both in the distribution of costs between employer and employee and in the intergenerational support that can be achieved from a defined benefit arrangement that enjoys the long-term support of its sponsor. In this she places herself in a long tradition of social thinkers that include Bryn Davies, Barbara Castle and Beveridge.

But the best thing about this paper is not that it is rooted in the past, it is that it is properly engaging with the future. Hilary goes on to explain that traditional final salary schemes “are not the only defined benefit fruit”, she engages with Hutton over CARE schemes and demonstrates the wide dispersal and costs between the differing types of defined benefit schemes that employers can consider.

This leads her to consider the Government’s agenda to find ways that defined benefit schemes can be offered under auto-enrolment so that pension coverage can be extended without being so watered down that employer provision is discredited.

She concludes that risks can be shared between employer and employee through hybrid schemes that include features of both defined benefit and contribution. Some of these ideas are new to me and some familiar but all are expressed with a clarity that makes me want to get out and talk to my clients about how they can do better for their staff and to staff about how they can help themselves by engaging with pensions.

Hilary is a teacher, a pedagogue. She argues with the force of someone who it on top of her game but her style is not hectoring – she is an educator not a salesperson!

Sometimes I find she misses a trick – surely there is more to risk sharing than a rebalancing of the risks between employer and employee?  And I would like to have read something on the opportunities presented by upgrading DC as well as rebalancing DB.

But her arguments are grounded in the here and now and may be the better for that.

She ends her paper with a fascinating paragraph which I will quote in full as a rallying cry behind which I can fully endorse

“The defined ambition debate provides the opportunity to look at risk and decide which risks can be shared and for what cost. This may require more innovation but the starting point is to define the consensus around quality pension provision. If this is done then the debate will not be seen as a threat to the remaining defined benefits provision, but as a very real threat to those who want pensions provided without any risk and at no or little cost”.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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