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Long term sustainability of defined benefit (DB) schemes
Both the Confederation of British Industry (‘CBI’) and the Pension and Lifetime Savings Association (‘PLSA’) have recently published reports looking at what can be done to help employers manage the real cost of DB schemes.
In the CBI’s policy briefing paper, they remind us that pension schemes are long term
“in pure cash terms, UK defined benefit is actually relatively well-funded. These schemes have well over £1tn of assets to meet future liabilities. It is worth remembering this, and the fact that liabilities fall over many decades, when presented with headlines about the latest movement of deficits in a month, driven by changes in the gilt rate.”
Recognising the problems facing DB schemes, the CBI calls for
In the PLSA DB taskforce’s Interim Report, they state that DB schemes are under severe pressure and that without change the likely outcome will be hardship for members and employers. Their findings and recommendations include:
According to figures reported to HMRC, since the new pension freedoms were introduced in April 2015 over 475,000 individuals have received flexible benefits, totalling £6.75bn.
Flexible payments include for example, flexi-access drawdown arrangements (taxed as income) and lump sum payments known as uncrystallised fund lump sum benefits for which 75% of the payment is taxed as income.
In a separate report, the Department of Work and Pensions shared research covering customers experiences of using Pension Wise, which was set up to provide guidance to individuals wishing to exercise their pension freedoms. Headlines include:
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