Hilary Salt – Founder of First Actuairal
A simple shift in communications could ensure the £20bn employers spend on DB each year isn’t wasted
Over the last decade we’ve seen the long march of defined benefit (DB) pension schemes from the sunny beaches of open schemes run by HR departments to the desolate windswept plains of finance departments. Where open schemes were a valuable part of the reward package, closed schemes are just another financial risk to be managed. Ironically handing the scheme over to finance has robbed it of its value. We need to reclaim schemes as pension schemes – so they offer real value to employers and scheme members.
We can now count the number of FTSE 100 companies offering a DB pension scheme to new employees on the fingers of one hand, and only around half allow existing employees to continue building up benefits. And yet employers contribute over £20bn a year to these schemes.
Often the closure of the DB scheme to new members means that pensions communications budgets are switched to the new defined contribution (DC) alternative. The DB scheme booklet becomes drab and out of date compared to the high tech online DC modeller. Employers don’t want to be trumpeting the benefits of a DB scheme that is only open to existing employees – especially if they suspect the chief risk officer is going to axe it at any minute.
So the DB scheme becomes a dirty secret whispered about around the water cooler. And once all accrual in the scheme ceases, members stop getting even an annual benefit statement so the value they attach to the legacy DB scheme plummets. Members end up thinking (and enter your own vernacular adjectives here) “this is a rubbish job with a rubbish employer and a rubbish pension”.
But hang on – those employers spending £20bn on pensions – surely that’s producing something better than rubbish? Yes it is – in fact for a very long time, many employees will be dependent on the bedrock of benefits from a legacy DB scheme for a large slice of their retirement income. So why don’t we give employees a combined annual benefit statement showing their legacy DB benefits, their accruing DC benefits, and the state benefits they can expect?
Why not give them some modelling tools so they can think about how to plan their retirement – assessing the freedom and choice flexibilities on their DC benefits without blindly thinking that the lack of freedom (or in other words, the security) associated with their DB benefits is a problem?
Why not give pensioners an annual benefit statement showing them not only what they’ve received that year but also what deficit contributions the employer has paid for them?
The benefits of doing this don’t just flow to scheme members. Employers don’t spend money on fleet cars or cleaning contractors without getting the best return from every £1 they spend. So why spend £20bn (admittedly not always willingly) on something without getting full value from it? If employees appreciate the value of their overall pensions benefits, they may well feel they can approach retirement in a far more positive way. A strange outcome we see exhibited time and again is that employees who are able to retire on a reasonable income feel far more willing to commit to working longer. The ability to go if they choose to gives employees the confidence to stay in work. And an employee who has chosen to work is more productive and engaged than one who feels they have to continue at the grindstone to avoid poverty.
And for the employer, the value is that pension scheme members – those currently working as well as pensioners, think “this is a good job with a good employer and a good pension”.
Hilary Salt is a founder of First Actuarial.
