Consultant society warns of 'pullback' from pure DC
UK - The president of the UK Society of Pension Consultants (SPC) has told IPE that the trend for replacing defined benefit (DB) occupational pensions schemes with defined contribution (DC) arrangements will prove unsustainable, and that a growing elderly workforce unable to retire will exert a financial cost on employers, eventually triggering a "pullback" from pure DC provision.
The remarks come after a number of high-profile closures of UK DB schemes to new members, including the Shell Contributory Pension Fund in the first quarter of 2012, and a UK Department for Work and Pensions (DWP) announcement that the average final salary pension would peak at £7,100 this year, falling to around £2,400 by 2060.
According to the DWP, around 6m UK pensioners benefit from some form of DB scheme, but only 10% of firms have final salary schemes that are still open.
Kevin LeGrand, president at the SPC - which represents a broad range of services providers to the pensions industry, including consultants, accountancy firms, law firms, insurers, administrators, independent trustees and asset managers - said: "Over the years, corporate sponsors have gradually come to see pensions purely as a liability."
Today, pensions benefits are not considered an important incentive for potential employees -partly because of the recession, but also because of a misperception among the younger workforce whose parents are enjoying retirements funded by DB provision and other sources of significant accumulated wealth.
Roger Mattingly, head of client relationship management at JLT Benefit Solutions and a member of the SPC board, said: "They may even have built a pot worth tens of thousands of pounds that looks very healthy to them because they aren't thinking about annuitisation and conversion rates, and don't understand it.
"The risk of future pensioner poverty isn't obvious to younger employees at the moment. But once that generation starts to approach retirement and realises its income will be substantially smaller that the previous generation's, that will probably start to exert and influence on pension provision for the next generation."
LeGrand pointed to the purely financial impact of pure DC provision on employers. Current DC arrangements are so inadequate, he argued, that employers would find their workforce increasingly dominated by septuagenarian and even octogenarian employees who are simply unable to retire, and whom employers cannot force to retire or take redundancy.
"Those employees probably don't really want still to be there in the office or on the shop floor, either," he said.
"Who is going to be the object of their resentment? The employer - because they didn't ensure everyone had a proper pension arrangement."
Employers looking for ways to move these people on will essentially have to "bribe" them, said LeGrand.
Having spent years contributing to a DC pension scheme, they will still have to find more money to provide their employees with the real means to retire - effectively bowing to the inevitability of DB, or at least 'cash-balance', provision.
"Ultimately, we will see a pullback from pure DC," LeGrand said. "Some forward-thinking employers are realising this already, but we will see more and more coming to the same conclusion."
UK supermarket chain Morrisons recently launched a cash-balance pension fund, which it said would mark a "significant" improvement over its existing DC scheme, and LeGrand suggested that this could be a model for future provision.
Both LeGrand and Mattingly acknowledged that the consultants' industry also had a responsibility to improve their service for DC schemes.
Mattingly spoke about efforts to make DC provision more interactive through website and smartphone access, to generate member interest in their pension savings, and LeGrand alluded to the huge amount of work being done by consultants on the default funds in DC arrangements and the need to educate members about exactly how the defined benefit pensions of yesteryear were underwritten.
Pensions minister Steve Webb has acknowledged the need for a balance between DB and DC, saying it was time for a "frank and open" debate and saying a consultation on a defined ambition scheme approach would soon launch.